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A Risk-Based Debt Sustainability Framework: Incorporating Balance Sheets and Uncertainty

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Author Info

  • Dale F. Gray
  • Elena Loukoianova
  • Samuel W. Malone
  • Cheng Hoon Lim

Abstract

This paper proposes a new framework for the analysis of public sector debt sustainability. The framework uses concepts and methods from modern practice of contingent claims to develop a quantitative risk-based model of sovereign credit risk. The motivation in developing this framework is to provide a clear and workable complement to traditional debt sustainability analysis which-although it has many useful applications-suffers from the inability to measure risk exposures, default probabilities and credit spreads. Importantly, this new framework can be adapted for policy analysis, including debt and reserve management.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/40.

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Length: 25
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/40

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Related research

Keywords: Debt sustainability; Risk management; Public debt; Reserve management policy;

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References

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  1. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
  3. repec:rus:hseeco:123922 is not listed on IDEAS
  4. David W. Wilcox, 1987. "The substainability of government deficits: implications of the present- value borrowing constraint," Working Paper Series / Economic Activity Section 77, Board of Governors of the Federal Reserve System (U.S.).
  5. Christian Keller & Peter Kunzel & Marcos Souto, 2007. "Measuring Sovereign Risk in Turkey: An Application of the Contingent Claims Approach," IMF Working Papers 07/233, International Monetary Fund.
  6. Luis Catão & Sandeep Kapur, 2006. "Volatility and the Debt-Intolerance Paradox," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 1.
  7. Peter Rowland & José Luis Torres, . "Determinants of Spread and Creditworthiness for Emerging Market Sovereign Debt:A Panel Data Study," Borradores de Economia 295, Banco de la Republica de Colombia.
  8. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 5.
  9. Hans Genberg & Astrit Sulstarova, 2004. "Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads," IHEID Working Papers 03-2004, Economics Section, The Graduate Institute of International Studies.
  10. Samuel Malone, 2005. "Managing Default Risk for Commodity Dependent Countries: Price Hedging in an Optimizing Model," Economics Series Working Papers 246, University of Oxford, Department of Economics.
  11. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  12. Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-wide Risk Transfer," IMF Working Papers 04/121, International Monetary Fund.
  13. Michael Gapen & Dale Gray & Cheng Hoon Lim & Yingbin Xiao, 2008. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Staff Papers, Palgrave Macmillan, vol. 55(1), pages 109-148, April.
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Citations

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Cited by:
  1. Zaman, Gheorghe & Georgescu, George, 2011. "Sovereign risk and debt sustainability: warning levels for Romania," MPRA Paper 32924, University Library of Munich, Germany.
  2. Paolo Panteghini, 2008. "Corporate Debt, Hybrid Securities and the Effective Tax Rate," CESifo Working Paper Series 2329, CESifo Group Munich.
  3. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2006. "A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy," NBER Working Papers 12637, National Bureau of Economic Research, Inc.
  4. Evan Tanner, 2013. "Fiscal Sustainability: A 21st Century Guide for the Perplexed," IMF Working Papers 13/89, International Monetary Fund.
  5. Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," Working Papers Central Bank of Chile 541, Central Bank of Chile.
  6. Andreas Sachs, 2013. "Governance Structures in Europe," WWWforEurope Deliverables series 2, WWWforEurope.
  7. Martin Cihák & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund.
  8. Serkan Arslanalp & Yin Liao, 2013. "Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors," CAMA Working Papers 2013-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Nuno Silva, 2010. "Inter-Sector Relations in the Portuguese Economy: an Application of Contingent," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  10. Bas van Aarle, 2013. "Surveillance and Control of Fiscal Consolidation on a Supranational Level," WWWforEurope Working Papers series 46, WWWforEurope.
  11. Nuno Silva & Nuno Ribeiro & António R. Antunes, 2011. "Towards a CCA-based Systemic Risk Indicator," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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