Working Paper: CEPR ID: DP14010
Authors: Xavier Debrun; Jonathan D. Ostry; Tim Willems; Charles Wyplosz
Abstract: Why can Japan sustain debts above 200 percent of GDP, while Ukraine defaulted on its debt when it was 30 percent of GDP? Answering that question is challenging. First, debt sustainability does not easily translate into operational concepts and indicators. Second, servicing the debt is a strategic decision, the result of a cost-benefit analysis. Thus markets can always, for good or bad reasons, question governments’ commitment to face their financial obligations. Third, uncertainty around public debt developments is large and difficult to model. Fourth, not all debts are born equal, as the currency composition, maturity structure, type of creditor and ownership of the debt affect exposure to rollover and liquidity risks. The paper surveys the knowns and unknowns of debt sustainability, including the tools helping us to understand vulnerabilities and to inform our judgment. Instead of embarking on the impossible mission to build a holistic, consistent and broadly-accepted debt-sustainability framework for practitioners, we take the more modest approach to review some of the key economic principles and statistical methods that form today’s leading practice in debt sustainability assessments.
Keywords: debt sustainability; analysis; willingness to pay; default
JEL Codes: H62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Japan's ability to sustain high debt levels (H63) | debt sustainability (H63) |
| domestic holders of debt (H63) | mitigate rollover risks (G52) |
| structure of debt and market perceptions (G32) | Ukraine's default (G33) |
| fiscal policy behavior, interest rates, and economic growth (O23) | fundamental determinants of debt sustainability (F34) |
| solvency (G33) | sustainability (Q01) |
| political will and market perceptions (G18) | role in sustainability (Q01) |
| liquidity risks (G33) | government's ability to meet obligations (H63) |
| rising debt (H63) | positive response of primary balance (F32) |
| understanding dynamics (C69) | assessing viability of public debt trajectories (H68) |