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A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an application to Brazilian data

Author

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  • Roberto Rigobon
  • Marcio Garcia

Abstract

In this paper we study the question of debt sustainability from a risk management perspective. The debt accumulation equation for any country involves variables that are stochastic and closely intertwined. When these aspects are taken into consideration the notion of debt sustainability is expanded to studying the stochastic properties of the debt dynamics. We illustrate the methodology by studying the Brazilian case. We find that even though the debt could be sustainable in the absence of risk, there are paths in which it is clearly unsustainable. Furthermore, we show that properties of the debt dynamics are closely related to the spreads on sovereign dollar denominated debt

Suggested Citation

  • Roberto Rigobon & Marcio Garcia, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an application to Brazilian data," Econometric Society 2004 Latin American Meetings 24, Econometric Society.
  • Handle: RePEc:ecm:latm04:24
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    File URL: http://repec.org/esLATM04/up.3693.1079642351.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    2. Missale, Alessandro & Giavazzi, Francesco & Benigno, Pierpaolo, 2002. " How Is the Debt Managed? Learning from Fiscal Stabilizations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 443-469, September.
    3. repec:rus:hseeco:123922 is not listed on IDEAS
    4. Bevilaqua, Afonso S & Garcia, Marcio G P, 2002. "Debt Management in Brazil: Evaluation of the Real Plan and Challenges Ahead," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(1), pages 15-35, January.
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    Cited by:

    1. repec:krk:eberjl:v:1:y:2013:i:4:p:7-19 is not listed on IDEAS
    2. repec:ids:ijepee:v:10:y:2017:i:2:p:171-184 is not listed on IDEAS
    3. Pedro Maia & Márcio Gomes Pinto Garcia, 2011. "A gerência recente do endividamento público brasileiro," Textos para discussão 595, Department of Economics PUC-Rio (Brazil).
    4. repec:fgv:epgrbe:v:71:y:2017:i:3:a:66468 is not listed on IDEAS
    5. Luiz de Mello, 2008. "Estimating a fiscal reaction function: the case of debt sustainability in Brazil," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 271-284.
    6. Tielens, J. & van Aarle, B. & Van Hove, J., 2014. "Effects of Eurobonds: A stochastic sovereign debt sustainability analysis for Portugal, Ireland and Greece," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 156-173.
    7. Graciela Laura Kaminsky & Pablo Vega-García, 2016. "Systemic And Idiosyncratic Sovereign Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 80-114, February.
    8. Baum, Anja & Eyraud,, Luc & Hodge, Andrew & Jarmuzek, Mariusz & Kim, Young & Mbaye, Samba & Ture, Elif, 2018. "How to calibrate fiscal rules : a primer," MPRA Paper 86423, University Library of Munich, Germany.
    9. Brad Setser & Ioannis Halikias & Alexander Pitt & Christoph B. Rosenberg & Brett E. House & Jens Nystedt & Christian Keller, 2005. "Debt-Related Vulnerabilities and Financial Crises," IMF Occasional Papers 240, International Monetary Fund.
    10. Hevia, Constantino, 2012. "Using pooled information and bootstrap methods to assess debt sustainability in low income countries," Policy Research Working Paper Series 5978, The World Bank.
    11. 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.
    12. Mauro Ferreira, "undated". "Debt Maturity in a Small Open Economy Under Inflation Target," EcoMod2007 23900024, EcoMod.
    13. Hans J. Blommestein & Javier Santiso, 2007. "New Strategies for Emerging Domestic Sovereign Bond Markets," OECD Development Centre Working Papers 260, OECD Publishing.
    14. International Monetary Fund, 2006. "Jamaica; Selected Issues," IMF Staff Country Reports 06/157, International Monetary Fund.
    15. Das, Udaibir S. & Oliva, Maria A. & Tsuda, Takahiro, 2012. "Sovereign Risk: A Macro-Financial Perspective," ADBI Working Papers 383, Asian Development Bank Institute.
    16. Gabriel Di Bella, 2008. "A Stochastic Framework for Public Debt Sustainability Analysis," IMF Working Papers 08/58, International Monetary Fund.
    17. Mário Jorge Cardoso de Mendonça & Cláudio Hamilton Matos dos Santos, 2008. "Revisitando a Função de Reação Fiscal no Brasil Pós-Real: Uma Abordagem de Mudanças de Regime," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807171729460, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    18. Shalva Mkhatrishvili & Zviad Zedginidze, 2015. "Modeling Macro-Fiscal Interlinkages: Case of Georgia," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 7(1), pages 15-41, March.

    More about this item

    Keywords

    Public Debt; Debt Sustainability; Country Risk; Brazil;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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