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Assessing debt sustainability in emerging market economies using stochastic simulation methods

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  • Hostland, Doug
  • Karam, Philippe

Abstract

The authors apply stochastic simulation methods to assess debt sustainability in emerging market economies and provide probability measures for projections of the external and public debt burden over the medium term. The vulnerability of public debt to adverse shocks is determined by a number of interrelated factors, including the volatility of output, financial fragility, the endogenous response of the risk premium, and sudden stops in private capital flows. The vulnerability of external debt is sensitive to the determination of the exchange rate and to the pricing of traded goods. The authors show that fiscal policy can act in a preemptive manner to prevent the debt burden from rising significantly over the medium term. This requires flexibility in fiscal planning, which many emerging market economies lack. Emerging market economies therefore face a difficult tradeoff between managing the risk of a debt crisis and pursuing other important fiscal policy objectives.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3821.

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Date of creation: 01 Jan 2006
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Handle: RePEc:wbk:wbrwps:3821

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Keywords: Economic Theory&Research; Strategic Debt Management; Settlement of Investment Disputes; Macroeconomic Management; External Debt;

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References

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Citations

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Cited by:
  1. Jafri, Sabina Khurram, 2009. "External Debt Sustainability Analysis for the Medium Term: A Case Study," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 62(3), pages 363-382.
  2. Evan Tanner & Issouf Samaké, 2006. "Probabilistic Sustainability of Public Debt," IMF Working Papers 06/295, International Monetary Fund.
  3. E. H. Gardner & Julian di Giovanni, 2008. "A Simple Stochastic Approach to Debt Sustainability Applied to Lebanon," IMF Working Papers 08/97, International Monetary Fund.
  4. Muhanji, Stella & Ojah, Kalu, 2011. "External shocks and persistence of external debt in open vulnerable economies: The case of Africa," Economic Modelling, Elsevier, vol. 28(4), pages 1615-1628, July.
  5. Philippe D Karam & Doug Hostland, 2006. "Specification of a Stochastic Simulation Model for Assessing Debt Sustainability in Emerging Market Economies," IMF Working Papers 06/268, International Monetary Fund.
  6. Alexis CRUZ-RODRÍGUEZ, 2014. "Assessing fiscal sustainability in some selected countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(6(595)), pages 7-22, June.
  7. Gabriel Di Bella, 2008. "A Stochastic Framework for Public Debt Sustainability Analysis," IMF Working Papers 08/58, International Monetary Fund.
  8. Carrera, Claudia Martínez & Vergara, Rodrigo, 2012. "Fiscal Sustainability: The Impact of Real Exchange Rate Shocks on Debt Valuation, Interest Rates and GDP Growth," World Development, Elsevier, vol. 40(9), pages 1762-1783.
  9. Akyüz, Yilmaz, 2008. "Global rules and markets : constraints over policy autonomy in developing countries," ILO Working Papers 420405, International Labour Organization.
  10. Küçük, Ugur N., 2009. "Emerging Market Local Currency Bond Market, Too Risky to Invest?," MPRA Paper 21878, University Library of Munich, Germany.
  11. Charles Wyplosz, 2007. "Debt Sustainability Assessment: The IMF Approach and Alternatives," IHEID Working Papers 03-2007, Economics Section, The Graduate Institute of International Studies.
  12. Muhanji, Stella & Malikane, Christopher & Ojah, Kalu, 2013. "Price and liquidity puzzles of a monetary shock: Evidence from indebted African economies," Economic Modelling, Elsevier, vol. 33(C), pages 620-630.
  13. Jha, Shikha & Quising, Pilipinas & Camingue, Shiela, 2009. "Macroeconomic Uncertainties, Oil Subsidies, and Fiscal Sustainability in Asia," ADB Economics Working Paper Series 150, Asian Development Bank.
  14. Philippe D Karam & A. R. Pagan, 2008. "A Small Structural Monetary Policy Model for Small Open Economies with Debt Accumulation," IMF Working Papers 08/64, International Monetary Fund.
  15. Yýlmaz Akyüz, . "Global Rules and Markets: Constraints over Policy Autonomy in Developing Countries," Working Papers 2007/5, Turkish Economic Association.
  16. Charles Wyplosz, 2011. "Debt Sustainability Assessment: Mission Impossible," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
  17. Paloma Acevedo & Enrique Alberola & Carmen Broto, 2008. "Local debt expansion and vulnerability reduction: an assessment for six crisis-prone countries," BIS Papers chapters, in: Bank for International Settlements (ed.), New financing trends in Latin America: a bumpy road towards stability, volume 36, pages 88-109 Bank for International Settlements.
  18. Aleksandar Zdravkovic & Aleksandra Bradic-Martinovic, 2012. "Public Debt Sustainability in Western Balkan Countries," Book Chapters, Institute of Economic Sciences.
  19. Paloma Acevedo & Enrique Alberola & Carmen Broto, 2007. "Local debt expansion... vulnerability reduction? An assessment for six crises-prone countries," Banco de Espa�a Working Papers 0733, Banco de Espa�a.

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