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When is debt sustainable?

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  • Jasper Lukkezen
  • Hugo Rojas-Romagosa

Abstract

This CPB Discussion Paper proposes indicators to assess government debt sustainability. Sustainable government finances can be achieved via three main channels: fiscal responses, economic growth and financial repression. The fiscal response provides information on the long-term country specific attitude towards fiscal sustainability and is estimated using Bohn (2008)’s approach. We combine the estimated fiscal response with a stochastic debt simulation and calculate the probability of debt-to-GDP ratios rising above some threshold. This is applied on historical data for seven OECD countries. In particular, the probability of debt-to-GDP ratios rising by more than 20% in the next decade clearly identifies countries that have sustainability concerns: Spain, Portugal and Iceland, from those that do not: US, UK, Netherlands and Belgium. Read also: CPB Policy Brief 2013/08 'Early warning indicators for debt sustainability'.

Suggested Citation

  • Jasper Lukkezen & Hugo Rojas-Romagosa, 2012. "When is debt sustainable?," CPB Discussion Paper 212, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:212
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    Cited by:

    1. Engwerda, Jacob & van Aarle, Bas & Plasmans, Joseph & Weeren, Arie, 2013. "Debt stabilization games in the presence of risk premia," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2525-2546.
    2. Johann Bröthaler & Michael Getzner & Gottfried Haber, 2015. "Sustainability of local government debt: a case study of Austrian municipalities," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 521-546, August.
    3. Jasper Lukkezen & Hugo Rojas-Romagosa, 2013. "Stochastic debt sustainability indicators," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 97-121.
    4. 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.
    5. Lees, Kirdan, 2013. "Fighting fit? Assessing New Zealand’s fiscal sustainability," NZIER Working Paper 2013/5, New Zealand Institute of Economic Research.
    6. 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.
    7. 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.
    8. Checherita-Westphal, Cristina & Žďárek, Václav, 2017. "Fiscal reaction function and fiscal fatigue: evidence for the euro area," Working Paper Series 2036, European Central Bank.
    9. Oronde Small & Leanora Brown & Gustavo Canavire‐Bacarreza, 2020. "The Fiscal Policy Response To Public Debt In Developing Countries," Contemporary Economic Policy, Western Economic Association International, vol. 38(1), pages 155-165, January.
    10. Ivantia S. Mokoginta & Ria Marisa Stephanie, 2015. "Structural breaks and fiscal sustainability of the Indonesian government budget," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 7(1), pages 33-47, April.
    11. Fabrice Collard & Michel Habib & Jean-Charles Rochet, 2015. "Sovereign Debt Sustainability In Advanced Economies," Journal of the European Economic Association, European Economic Association, vol. 13(3), pages 381-420, June.
    12. Helmut Herwartz & Malte Rengel, 2018. "Size-corrected inference in fiscal policy reaction functions: a three country assessment," Empirical Economics, Springer, vol. 55(2), pages 391-416, September.

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    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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