Cover of: A Stochastic Indicator for Sovereign Debt Sustainability
Hugo Rojas-Romagosa, Jasper Lukkezen

A Stochastic Indicator for Sovereign Debt Sustainability

Section: Articles
Volume 72 (2016) / Issue 3, pp. 229-267 (39)
Published 09.07.2018
DOI 10.1628/001522116X1473325697904
  • article PDF
  • available
  • 10.1628/001522116X1473325697904
Summary
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).