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Stochastic debt sustainability analysis: a methodological note

Author

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  • Dimitrios Papaoikonomou

    (Bank of Greece)

Abstract

This paper mainly focuses on the approach taken at the Bank of Greece regarding the application of stochastic methods to debt sustainability analysis, providing also a discussion of alternative options. Caution is advised in the way that stochastic methods are made operational, as they are far from exact and rely on assumptions of various degrees of plausibility, which are often not stated explicitly. A Monte Carlo exercise reveals that under the approach taken by the European Commission, the measurement of dispersion can be subject to significant bias, ranging from an over-estimation by 45% to an under-estimation in excess of 80%, depending on the time-series properties of the data.

Suggested Citation

  • Dimitrios Papaoikonomou, 2025. "Stochastic debt sustainability analysis: a methodological note," Working Papers 338, Bank of Greece.
    • Handle: RePEc:bog:wpaper:338
    DOI: 10.52903/wp2025338
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    Keywords

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    JEL classification:

    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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