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When is debt sustainable?

Jasper Lukkezen and Hugo Rojas-Romagosa ()
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Jasper Lukkezen: CPB Netherlands Bureau for Economic Policy Analysis

CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: This CPB Discussion Paper proposes indicators to assess government debt sustainability. Sustainable government finances can be achieved via three main channels: fiscal responses, economic growth and financial repression. The fiscal response provides information on the long-term country specific attitude towards fiscal sustainability and is estimated using Bohn (2008)’s approach. We combine the estimated fiscal response with a stochastic debt simulation and calculate the probability of debt-to-GDP ratios rising above some threshold. This is applied on historical data for seven OECD countries. In particular, the probability of debt-to-GDP ratios rising by more than 20% in the next decade clearly identifies countries that have sustainability concerns: Spain, Portugal and Iceland, from those that do not: US, UK, Netherlands and Belgium.Read also: CPB Policy Brief 2013/08 'Early warning indicators for debt sustainability'.

JEL-codes: E4 E6 H0 H6 (search for similar items in EconPapers)
Date: 2012-06
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