Economics at your fingertips  

Implicit public debt thresholds: An operational proposal

Mario Alloza, Javier Andrés (), Javier Pérez () and Juan A. 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)
JEL-codes: H63 H68 E61 E62 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

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
Bibliographic data for series maintained by Nithya Sathishkumar ().

Page updated 2021-04-13
Handle: RePEc:eee:jpolmo:v:42:y:2020:i:6:p:1408-1424