IDEAS home Printed from https://ideas.repec.org/p/oec/ecoaaa/1229-en.html
   My bibliography  Save this paper

Limits to government debt sustainability

Author

Listed:
  • Jean-Marc Fournier

    (OECD)

  • Falilou Fall

    (OECD)

Abstract

The recent euro area sovereign debt crisis has shown the importance of market reactions for the sustainability of debt. The objective of this paper is to calculate endogenous government debt limits given the markets assessment of the probability to default. The estimated primary balance reaction function to growing debt has the “fiscal fatigue” property (a loosening fiscal effort makes the primary balance insufficient to support rising debt) at high debt levels. It is the combination of this feature of the primary balance reaction function with the market interest rate reaction to growing debt that determines the government debt limit beyond which debt cannot be rolled over. An application of this framework to OECD countries over the period 1985 – 2013 shows that current debt limits are high for most of the OECD thanks to particularly low current interest rates. It shows also for some countries that current debt levels are not sustainable without a change in government behaviour as compared to the past. Most importantly, the framework illustrates the state contingent nature of debt limits and therefore the vulnerability of governments to a change in macroeconomic conditions and to market reactions. Les limites à la viabilité de la dette publique La récente crise de la dette souveraine dans la zone euro a montré l’importance des réactions des marchés pour la viabilité de la dette. L’objectif de ce document est de calculer les limites endogènes de la dette publique compte tenu de l’évaluation que font les marchés de la probabilité de défaut. À de hauts niveaux d’endettement, la fonction de réaction estimée du solde primaire à une dette croissante présente la propriété de « fatigue budgétaire » (c’est-à-dire qu’un relâchement des efforts budgétaires aboutit à un solde primaire insuffisant pour soutenir l’accroissement de la dette). Cette propriété de la fonction de réaction du solde primaire, combinée à la réaction des marchés à l’accroissement de la dette via les taux d’intérêt, détermine la limite de la dette publique au-delà de laquelle celle-ci ne peut plus être refinancée. L’application de ce cadre aux pays de l’OCDE pour la période 1985-2013 montre que les limites actuelles de la dette sont hautes pour la majorité d’entre eux, grâce à des taux d’intérêt particulièrement bas actuellement. Elle montre également que les niveaux d’endettement actuels ne sont pas viables pour un certain nombre de pays. Surtout, ce cadre montre que les limites de la dette sont conditionnées par l’état de l’économie et que par conséquent, les États sont vulnérables à toute évolution de la situation macroéconomique et aux réactions des marchés.

Suggested Citation

  • Jean-Marc Fournier & Falilou Fall, 2015. "Limits to government debt sustainability," OECD Economics Department Working Papers 1229, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1229-en
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1787/5jrxv0fctk7j-en
    Download Restriction: no

    References listed on IDEAS

    as
    1. Mendoza, Enrique G. & Ostry, Jonathan D., 2008. "International evidence on fiscal solvency: Is fiscal policy "responsible"?," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1081-1093, September.
    2. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    3. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
    4. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-3.
    5. Hansen, Bruce E, 1999. " Testing for Linearity," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 551-576, December.
    6. Falilou Fall & Jean-Marc Fournier, 2015. "Macroeconomic uncertainties, prudent debt targets and fiscal rules," OECD Economics Department Working Papers 1230, OECD Publishing.
    7. Philippe Burger & Marina Marinkov, 2012. "Fiscal rules and regime-dependent fiscal reaction functions: The South African case," OECD Journal on Budgeting, OECD Publishing, vol. 12(1), pages 1-29.
    8. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    9. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    10. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    11. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
    12. Debra Bloch & Falilou Fall, 2016. "Government Debt Indicators:Understanding the Data," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-28, February.
    13. Falilou Fall & Debra Bloch & Jean-Marc Fournier & Peter Hoeller, 2015. "Prudent debt targets and fiscal frameworks," OECD Economic Policy Papers 15, OECD Publishing.
    14. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
    15. João Medeiros, 2012. "Stochastic debt simulation using VAR models and a panel fiscal reaction function – results for a selected number of countries," European Economy - Economic Papers 2008 - 2015 459, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    16. 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.
    17. David Haugh & Patrice Ollivaud & David Turner, 2009. "What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area," OECD Economics Department Working Papers 718, OECD Publishing.
    18. Charl Jooste & Alfredo Cuevas & Ian C. Stuart & Philippe Burger, 2011. "Fiscal sustainability and the fiscal reaction function for South Africa," IMF Working Papers 11/69, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Everaert, Gerdie & Jansen, Stijn, 2018. "On the estimation of panel fiscal reaction functions: Heterogeneity or fiscal fatigue?," Economic Modelling, Elsevier, vol. 70(C), pages 87-96.
    2. Debra Bloch & Falilou Fall, 2016. "Government Debt Indicators:Understanding the Data," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-28, February.
    3. Falilou Fall & Debra Bloch & Jean-Marc Fournier & Peter Hoeller, 2015. "Prudent debt targets and fiscal frameworks," OECD Economic Policy Papers 15, OECD Publishing.
    4. repec:bpj:glecon:v:18:y:2018:i:1:p:12:n:2 is not listed on IDEAS
    5. Paniagua, Jordi & Sapena, Juan & Tamarit, Cecilio, 2017. "Fiscal sustainability in EMU countries: A continued fiscal commitment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 85-97.
    6. Checherita-Westphal, Cristina & Žďárek, Václav, 2017. "Fiscal reaction function and fiscal fatigue: evidence for the euro area," Working Paper Series 2036, European Central Bank.
    7. R. Golinelli & I. Mammi & A. Musolesi, 2018. "Parameter heterogeneity, persistence and cross-sectional dependence: new insights on fiscal policy reaction functions for the Euro area," Working Papers wp1120, Dipartimento Scienze Economiche, Universita' di Bologna.
    8. M. Bussière & L. Ferrara & M. Juillard & D. Siena, 2017. "Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results," Working papers 625, Banque de France.
    9. Jarmila Botev & Jean-Marc Fournier & Annabelle Mourougane, 2016. "A Re-assessment of Fiscal Space in OECD Countries," OECD Economics Department Working Papers 1352, OECD Publishing.

    More about this item

    Keywords

    debt; dette; fiscal policy; politique budgétaire; sustainability; viabilité de la dette publique;

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oec:ecoaaa:1229-en. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/edoecfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.