Working Paper: NBER ID: w10336
Authors: Mário Garcia; Roberto Rigobon
Abstract: In this paper we study the question of debt sustainability from a risk management perspective. The debt accumulation equation for any country involves variables that are stochastic and closely intertwined. When these aspects are taken into consideration the notion of debt sustainability is expanded to studying the stochastic properties of the debt dynamics. We illustrate the methodology by studying the Brazilian case. We find that even though the debt could be sustainable in the absence of risk, there are paths in which it is clearly unsustainable. Furthermore, we show that properties of the debt dynamics are closely related to the spreads on sovereign dollar denominated debt.
Keywords: No keywords provided
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt accumulation equation (stochastic variables) (C29) | debt sustainability (H63) |
| real interest rates (E43) | debt-to-GDP ratio (H68) |
| primary deficit (H62) | debt-to-GDP ratio (H68) |
| GDP growth (O49) | debt-to-GDP ratio (H68) |
| EMBI Brazil spread (F29) | debt sustainability (H63) |
| debt-to-GDP ratio (H68) | exceeding risky thresholds (D81) |