Stochastic debt sustainability indicators

Lukkezen, Jasper; Rojas‐Romagosa, Hugo

doi:10.3917/reof.127.0097

Cited by 6 publications

(4 citation statements)

References 24 publications

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“…There are several studies investigating the positive relationship between the primary balance and public debt. See for example,Bohn (1998),Medeiros (2012),Lukkezen and Rojas-Romagosa (2013),Bartoletto et al (2014),Everaert and Jansen (2018).8 More recently, Zhou and Mauro (2020), using historical, show that negative interest-growth differentials have frequently occurred in both advanced and emerging economies, and have often displayed a persistent pattern. 9 It should be noted that, contrary to what assumed inLindgren (2021), here policymakers directly observe these potential effects of fiscal policy decisions on the interest-growth differential 10 See alsoBalibek and Köksalan (2010) for a model of debt management taking into account the uncertainty concerning the future state of the economy.…”

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confidence: 99%

Optimal correction of the public debt and measures of fiscal soundness

2022

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This paper derives the optimal response of the primary budget balance to changes in the public debt as a share of gross domestic product (GDP) in a stochastic model of debt. Under the optimal solution, the surplus reactivity to the debt-GDP ratio is independent of the debt ratio itself, but its size depends on the degree of uncertainty surrounding the impact of fiscal policies. We characterize the properties of the optimal control policy by proposing different metrics that may be used to assess fiscal soundness and as early warning indicators of fiscal imbalances.

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confidence: 99%

Optimal correction of the public debt and measures of fiscal soundness

2022

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“…The set of values taken by the economy until 't' is h t =(s t , s t-1 , ... s 0 ), where h t is the set of values assumed in H t , and p (s t+1 | h t ) indicates the price paid for government bonds in period t, from which at t+1 a unit of consumer goods can be purchased under condition s t +1. Consequently, the righthand side of the equation represents the statedependent market value of newly issued debt (Lukkezen and Rojas-Romagosa, 2013).…”

Section: Literature Reviewmentioning

confidence: 99%

Fiscal Sustainability in Focus

Baksay¹,

Kiss²

2023

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As regards the concept of fiscal sustainability, our study finds that in this area a variety of issues can be examined with very different tools. The issues may concern the achievement of fiscal constraints over an infinite horizon, the realisation of a specific target, or the fiscal policy response to indebtedness observed in the past. In some cases additional aspects of sustainability are considered too, such as the effects of ageing, although the consequences of rising inequality are mostly overlooked. The model may also include an estimate of the investment needed to mitigate the effects of climate change, but the impact of the impact of climate change is outside the model framework. To answer these questions, it may also be necessary to include uncertainty, in which case the discounting of future debt, tax revenue and expenditure with an intertemporal budget constraint in a stochastic environment depends on the probability distribution of these factors under different states. Our sustainability analysis, on the one hand, presents the best practice, complemented with the directions we have identified for further improvement. On the other hand, we have made the necessary corrections to avoid oversimplification in calculating debt dynamics.

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“…Debt sustainability is generally understood as a situation in which the ratio of debt to GDP ratio is stationary (Bohn, 1991;Carrera and Vergara, 2012). Then, the external debt is deemed sustainable if the external debt to GDP ratio is mean-reverting over the medium-and long-term (Lukkezen and Rojas-Romagosa, 2013). This is the approach that we follow in this paper, as we equate the long-term increase in external debt to GDP ratio with a decrease in external debt sustainability.…”

Section: Introductionmentioning

confidence: 99%