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How Sustainable Are Public Debt Levels in Emerging Europe?

  • Markus Eller

    ()

    (Oesterreichische Nationalbank, Foreign Research Division)

  • Jarmila Urvová

    ()

    (Oesterreichische Nationalbank (OeNB), Foreign Research Division)

To assess to which extent public debt positions in four CESEE economies (the Czech Republic, Hungary, Poland and Slovakia) are sustainable in the medium term, we apply a stochastic debt sustainability analysis (SDSA), building on Celasun, Debrun and Ostry (2007). In contrast to conventional debt sustainability analyses, this approach explicitly accounts for the risks surrounding medium-term debt dynamics, e.g. risks stemming from the interaction of (endogenously determined) fiscal and macroeconomic shocks. This is one of the first papers explicitly applying an SDSA to countries in emerging Europe. The baseline projections suggest that, on average, public debt would not get out of control in any of the four countries until 2016. However, when we also account for the risks around the median projection, the primary balance is apparently not responsive enough (with regard to public debt) so that increasing debt paths cover a considerable share of the overall frequency distribution. The probability of reaching, in 2016, a higher debt-to-GDP ratio than in 2011 is largest in the Czech Republic and Slovakia and less pronounced in Hungary and Poland. When confronting the baseline projections with alternative policy scenarios, we can confirm the importance of a timely and continuous response to debt developments; otherwise public debt will quickly get out of control. Furthermore, compliance with the defined Stability and Convergence Programme targets limits the overall risks to the debt outturns.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Focus-on-European-Economic-Integration/2012/Focus-on-European-Economic-Integration-Q4-12/chapters/feei_2012_q4_studies_eller_urvova_tcm16-251595.pdf
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Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Focus on European Economic Integration.

Volume (Year): (2012)
Issue (Month): 4 ()
Pages: 48-79

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Handle: RePEc:onb:oenbfi:y:2012:i:4:b:1
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  1. Fabrizio Balassone & Jorge Cunha & Geert Langenus & Bernhard Manzke & Jeanne Pavot & Doris Prammer & Pietro Tommasino, 2011. "Fiscal sustainability and policy implications: a post-crisis analysis for the euro area," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 3(2), pages 210-234.
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  3. Carlos Díaz Alvarado & Alejandro Izquierdo & Ugo Panizza, 2004. "Fiscal Sustainability in Emerging Market Countries with an Application to Ecuador," Research Department Publications 4371, Inter-American Development Bank, Research Department.
  4. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
  5. Jesús Crespo Cuaresma & Martin Feldkircher & Tomáš Slacík & Julia Wörz, 2009. "Simple but Effective: The OeNB’s Forecasting Model for Selected CESEE Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 84-95.
  6. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  7. Hafer, R. W. & Sheehan, Richard G., 1989. "The sensitivity of VAR forecasts to alternative lag structures," International Journal of Forecasting, Elsevier, vol. 5(3), pages 399-408.
  8. Markus Eller, 2009. "Fiscal Position and Size of Automatic Stabilizers in the CESEE EU Member States – Implications for Discretionary Measures," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 78-84.
  9. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
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