Fiscal Stress Index as a Leading Indicator: An Application on Turkey

Buket Kırcı Altınkeski
Tekirdağ Namık Kemal University


The aim of this study is to create a new financial stress index that will provide early warning signals for Turkish economy and to determine the relationship between this index and economic activity variables. Financial sustainability risks are usually followed by financial crisis along with the dangers associated with irregular fiscal adjustment. The findings of the study are expected to provide insights to financial institutions and policy makers regarding the perception of financial stress in the economy and the direction of fiscal policy through a leading indicator of financial stress. For this purpose, first of all, a set of financial indicators to be used in the measurement of sustainability risk and the calculation of financial stress was created by using the conceptual framework developed by Cottarelli (2011). Turkey’s financial structure for the period of 1990-2021 has been determined by taking into account the financial sustainability indicators such as basic financial variables related to asset and liability management and long-term financial trend variables. The aggregation process has been based on the approach developed by Kaminsky, Lizondo and Reinhart (1998). It is the first study in Turkish literature to create financial index for Turkish economy using early warning signal approach. In addition to that, the study has examined the linear dynamic relationship of the mentioned index with the economic activity variables through frequency domain casuality tests and the nonlinear dynamic relationship was examined by Markov regime-switching VAR and causality tests based on regimes which are related to this model and impulse response analysis. It is thought that the findings of the study will contribute to the deveplopment of a financial monitoring framework with the primary purpose of assessing financial re-borrowing risks. Monitoring financial sustainability in developing economies is of vital importance, especially during periods of economic crisis.

How to cite this book

Kırcı Altınkeski, B. (2023). Fiscal Stress Index as a Leading Indicator: An Application on Turkey. Özgür Publications. DOI:



February 22, 2023