Assessing Debt Sustainability in a Stochastic Environment: 200 Years of Dutch Debt and Deficit Management
AbstractWhen debt levels approach critical levels, tax payers may revolt against the associated debt service burden. Funding problems may arise in capital markets when lenders anticipate such revolts and refuse to participate in debt auctions. We provide a stochastic framework to assess whether such problems may arise and argue that the key to fiscal sustainability in a stochastic environment is a feedback rule from debt level shocks back to corresponding adjustments in the primary surplus. We show that such feedback rules narrow future distributions of debt–output ratios and so reduce crisis probabilities. We apply the methodology to Dutch debt and deficit data spanning two centuries. Our results strongly argue for the incorporation of rules stipulating tightening fiscal policy whenever debt stocks exceed previously agreed upon targets (like in the original Eurozone Stability pact). Copyright The Author(s) 2012
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Springer in its journal De Economist.
Volume (Year): 160 (2012)
Issue (Month): 3 (September)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=100260
Deficits; Debt sustainability; Fiscal rules; E62; H62; H63; H68;
Other versions of this item:
- Sweder van Wijnbergen & Alexander France, 2012. "Assessing Debt Sustainability in a Stochastic Environment: 200 years of Dutch Debt and Deficit Management," Tinbergen Institute Discussion Papers 12-011/2, Tinbergen Institute.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003.
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
- Trehan, Bharat & Walsh, Carl E, 1991.
"Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 23(2), pages 206-23, May.
- Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
- Schabert, Andreas & van Wijnbergen, Sweder, 2006.
"Debt, Deficits and Destabilizing Monetary Policy in Open Economies,"
CEPR Discussion Papers
5590, C.E.P.R. Discussion Papers.
- Andreas Schabert & Sweder van Wijnbergen, 2006. "Debt, Deficits, and Destabilizing Monetary Policy in Open Economies," Tinbergen Institute Discussion Papers 06-045/2, Tinbergen Institute.
- Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2011.
"Inflation and the fiscal limit,"
European Economic Review,
Elsevier, vol. 55(1), pages 31-47, January.
- Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
- Andreas Schabert & Sweder J.G. van Wijnbergen, 2011. "Sovereign Default and the Stability of Inflation Targeting Regimes," Tinbergen Institute Discussion Papers 11-064/2/ DSF20, Tinbergen Institute.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.