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A Stochastic Indicator for Sovereign Debt Sustainability

Jasper Lukkezen and Hugo Rojas-Romagosa ()

FinanzArchiv: Public Finance Analysis, 2016, vol. 72, issue 3, 229-267

Abstract: We propose a stochastic indicator to assess government debt sustainability. This indicator combines the effect of economic uncertainty - represented by stochastic simulations of interest and growth rates - with the expected fiscal response, which provides information on the long-term country-specific attitude towards fiscal sustainability. We apply our framework to postwar data for nine OECD countries and find that our indicator - the potential increase in debt in bad states of the world - distinguishes countries that have sustainability concerns (Italy, Spain, Portugal, and Iceland) from those that do not (the United States, the United Kingdom, the Netherlands, Belgium, and Germany).

Keywords: public debt; fiscal policy; debt sustainability; stochastic simulations (search for similar items in EconPapers)
JEL-codes: H6 H3 E6 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1628/001522108X1473325697904

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