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Implicit public debt thresholds: an empirical exercise for the case of Spain

Author

Listed:
  • Javier Andrés

    (University of Valencia)

  • Javier J. Pérez

    (Banco de España)

  • Juan A. Rojas

    (ESM)

Abstract

We extend previous work that combines the Value at Risk approach with estimation of the correlation pattern of the macroeconomic determinants of public debt dynamics by means of Vector Auto Regressions (VARs). These estimated models are used to compute the probability that the public debt ratio exceeds a given threshold, by means of MonteCarlo simulations. We apply this methodology to Spanish data and compute time-series probabilities to analyse the possible correlation with market risk assessment, measured by the spread over the German bond. Taking into account the high correlation between the probability of crossing a pre-specifi ed debt threshold and the spread, we go a step further and ask what would be the threshold that maximises the correlation between the two variables. The aim of this exercise is to gauge the implicit debt threshold or «prudent debt level» that is most consistent with market expectations as measured by the sovereign yield spread. The level thus obtained is consistent with the medium-term debt-to-GDP ratio anchor of 60% of GDP.

Suggested Citation

  • Javier Andrés & Javier J. Pérez & Juan A. Rojas, 2017. "Implicit public debt thresholds: an empirical exercise for the case of Spain," Working Papers 1701, Banco de España.
    • Handle: RePEc:bde:wpaper:1701
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Joan Maria Mussons Olivella, 2020. "Fiscal Responsiveness to Public Debt: An Analysis of Regional Debt Limit Uncertainty in Spain," Hacienda Pública Española / Review of Public Economics, IEF, vol. 233(2), pages 55-83, June.
    2. Nzeh, Innocent Chile, 2020. "Public Debt and Economic Growth in Nigeria: Investigating the Optimal Threshold Level," Asian Development Policy Review, Asian Economic and Social Society, vol. 8(2), pages 112-127, June.
    3. Maria Manuel Campos & Cristina Checherita-Westphal, 2019. "Economic consequences of high public debt and challenges ahead for the euro area," Working Papers o201904, Banco de Portugal, Economics and Research Department.
    4. Pablo Burriel & Cristina Checherita-Westphal & Pascal Jacquinot & Matthias Schön & Nikolai Stähler, 2020. "Economic consequences of high public debt: evidence from three large scale DSGE models," Working Papers 2029, Banco de España.
    5. Afonso, António & Gonçalves, Luis, 2020. "The policy mix in the US and EMU: Evidence from a SVAR analysis," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    6. Francisco de Castro & Francisco Martí & Antonio Montesinos & Javier J. Pérez & Antonio Jesús Sánchez Fuentes, 2018. "A Quarterly Fiscal Database Fit for Macroeconomic Analysis," Hacienda Pública Española / Review of Public Economics, IEF, vol. 224(1), pages 139-155, March.

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    More about this item

    Keywords

    public debt; early warning indicators; fiscal sustainability;
    All these keywords.

    JEL classification:

    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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