Economics at your fingertips  

Implicit public debt thresholds: an empirical exercise for the case of Spain

Javier Andrés (), Javier Pérez () and Juan Rojas ()

No 1701, Working Papers from Banco de España, Working Papers Homepage

Abstract: We extend previous work that combines the Value at Risk approach with estimation of the correlation pattern of the macroeconomic determinants of public debt dynamics by means of Vector Auto Regressions (VARs). These estimated models are used to compute the probability that the public debt ratio exceeds a given threshold, by means of MonteCarlo simulations. We apply this methodology to Spanish data and compute time-series probabilities to analyse the possible correlation with market risk assessment, measured by the spread over the German bond. Taking into account the high correlation between the probability of crossing a pre-specifi ed debt threshold and the spread, we go a step further and ask what would be the threshold that maximises the correlation between the two variables. The aim of this exercise is to gauge the implicit debt threshold or «prudent debt level» that is most consistent with market expectations as measured by the sovereign yield spread. The level thus obtained is consistent with the medium-term debt-to-GDP ratio anchor of 60% of GDP.

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)
Pages: 28 pages
Date: 2017-01
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link) ... /17/Fich/dt1701e.pdf First version, January 2017 (application/pdf)

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:

Access Statistics for this paper

More papers in Working Papers from Banco de España, Working Papers Homepage Contact information at EDIRC.
Bibliographic data for series maintained by María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España ().

Page updated 2020-11-23
Handle: RePEc:bde:wpaper:1701