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Sovereign debt sustainability scenarios based on an estimated model for Spain

Listed author(s):
  • Jan in 't Veld
  • Andrea Pagano
  • Marco Ratto
  • Werner Roeger
  • Istvan P. Szekely

This paper proposes a framework for sovereign debt sustainability assessment based on an estimated DSGE model. One advantage of this is that it allows taking into account feedback effects of debt ratios, spreads and fiscal measures on growth and tax bases, and thus capture the impact of changes in the composition of GDP which is pronounced during fiscal consolidation. Unsustainable debt developments may give rise to increasing interest rate spreads which could further reduce growth and tax revenue and worsen debt dynamics, while fiscal austerity measures are likely to reduce growth and lower tax revenues in the short run. Capturing the impact of risk premium on growth and public debt dynamics is crucial to understand current developments and policy trade-offs in euro area periphery countries.

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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers 2008 - 2015 with number 466.

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Length: 25 pages
Date of creation: Nov 2012
Handle: RePEc:euf:ecopap:0466
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