Maximum Sustainable Debt Across Countries: An Assessment using P-Theory

This paper provides a parsimonious yet tractable approach to evaluating maximum sustainable debt across countries and over time within the p-theory framework developed by Jiang et al. (2024). By incorporating tax distortions, asset-pricing components (risk-free rates, convenience yields, and jump-risk premia), and sovereign default risks into the model, we calibrate it for a large sample of over 170 countries. Our illustrative findings show that while current debt levels in many economies remain within maximum sustainable debt levels, debt burdens in many emerging markets and low-income countries are near their respective sustainable levels. In contrast, a few countries that are in—or at high risk of—debt distress have debt levels exceeding their sustainable thresholds. The analysis highlights how sustainable debt estimates evolve over time in response to shifts in financial conditions and macro-fiscal fundamentals. These estimates are particularly sensitive to key parameters—most notably when interest-growth differentials are narrow.