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Stochastic debt sustainability indicators

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  • Jasper Lukkezen
  • Hugo Rojas-Romagosa

Abstract

This paper proposes indicators to assess government debt sustainability in the medium and long term. We follow the methodological approach by Bohn (2008) and distinguish three channels that contribute to sustainable government finances: economic growth, real interest payments and fiscal responses. We combine the estimated fiscal response with a stochastic debt simulation to create two indicators. The first captures the probability of debt-to-GDP ratios rising by more than 20 percentage points during a 10-year period. A government will fail on this indicator if its fiscal response to an increase in debt is not sufficient to control the swings in debt caused by shocks to real growth and interest payments. The second indicator captures the probability of debt levels being above 90% of GDP in 10 years. We estimate these indicators using historical data for nine OECD countries. We find that the probability of debt-to-GDP ratios rising by more than 20 percentage points in the next decade clearly identifies countries that have sustainability concerns: Italy, Spain, Portugal and Iceland, from those that do not: US, UK, Netherlands, Belgium and Germany. JEL Classification: E4, E6, H0, H6

Suggested Citation

  • Jasper Lukkezen & Hugo Rojas-Romagosa, 2013. "Stochastic debt sustainability indicators," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 97-121.
    • Handle: RePEc:cai:reofsp:reof_127_0097
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    Cited by:

    1. Fisera, Boris & Workie Tiruneh, Menbere & Hojdan, David, 2021. "Currency depreciations in emerging economies: A blessing or a curse for external debt management?," International Economics, Elsevier, vol. 168(C), pages 132-165.
    2. Beqiraj, Elton & Fedeli, Silvia & Forte, Francesco, 2018. "Public debt sustainability: An empirical study on OECD countries," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 238-248.
    3. Katia Berti & Eugeniu Colesnic & Cyril Desponts & Stephanie Pamies & Etienne Sail, 2016. "Fiscal Reaction Functions for European Union Countries," European Economy - Discussion Papers 028, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Paniagua, Jordi & Sapena, Juan & Tamarit, Cecilio, 2017. "Fiscal sustainability in EMU countries: A continued fiscal commitment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 85-97.
    5. Barbara Annicchiarico & Fabio Di Dio & Stefano Patrì, 2023. "Optimal correction of the public debt and measures of fiscal soundness," Metroeconomica, Wiley Blackwell, vol. 74(1), pages 138-162, February.

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    More about this item

    Keywords

    fiscal policy; public debt; sustainability;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H0 - Public Economics - - General
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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