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

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Author Info
Elena Loukoianova
Cheng Hoon Lim
Samuel Malone
Dale F. Gray
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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/40.

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Length: 25 pages
Date of creation: 11 Feb 2008
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Handle: RePEc:imf:imfwpa:08/40

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Keywords: Risk management ; Public sector ; Public debt ; Reserve management policy ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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.:
  1. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August. [Downloadable!] (restricted)
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  3. Marcos Souto & Christian Keller & Peter Kunzel, 2007. "Measuring Sovereign Risk in Turkey: An Application of the Contingent Claims Approach," IMF Working Papers 07/233, International Monetary Fund. [Downloadable!]
  4. 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. [Downloadable!]
  5. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February. [Downloadable!] (restricted)
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  6. Hans Genberg & Astrit Sulstarova, 2004. "Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads," HEI Working Papers 03-2004, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
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  7. Peter Rowland & José Luis Torres Trespalacios, 2004. "Determinants Of Spread And Creditworthiness For Emerging Market Sovereign Debt: A Panel Data Study," BORRADORES DE ECONOMIA 002337, BANCO DE LA REPÚBLICA. [Downloadable!]
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  8. Michael T. Gapen & Yingbin Xiao & Cheng Hoom Lim & Dale F. Gray, 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. [Downloadable!]
  9. repec:rus:hseeco:123922 is not listed on IDEAS
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Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
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