 Implicit public debt thresholds: An operational proposalMario Alloza, Javier Andrés (), Javier Pérez and Juan Rojas Journal of Policy Modeling, 2020, vol. 42, issue 6, 1408-1424 Abstract: Gauging the public debt-to-GDP ratio a country can sustain in the medium-run without putting fiscal sustainability at risk is a question of key relevance for policy-makers. Deviations from a safe level of debt should be watched over in order to take corrective measures. In this paper we make a proposal for an operational characterization of the “prudent debt level”. To do so, we use standard methods based on Vector Autoregressions to compute the probability that the public debt ratio exceeds a given threshold, using the Spanish case as an example. The resulting probabilities are highly and positively correlated with market risk assessment, measured by the spread with respect to the German bond. Our estimation of the “prudent debt level” is obtained as the debt-to-GDP ratio that maximizes the correlation between the probability of passing a pre-specified debt threshold and the spread. The so-obtained implicit debt threshold or “prudent debt level”, which is consistent with the medium-term debt-to-GDP ratio anchor of 60% of GDP, presents several advantages as a complement to existing DSA toolkits. Keywords: Public debt; Early warning indicators; Fiscal sustainability (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:42:y:2020:i:6:p:1408-1424 DOI: 10.1016/j.jpolmod.2020.05.005 Access Statistics for this article Journal of Policy Modeling is currently edited by A. M. Costa More articles in Journal of Policy Modeling from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.