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Type Journal Article
Scope Discipline-based scholarship
Title Sovereign debt sustainability in advanced economies
Organization Unit
Authors
  • Fabrice Collard
  • Michel Habib
  • Jean-Charles Rochet
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
Journal Title Journal of the European Economic Association
Publisher Wiley-Blackwell Publishing, Inc.
Geographical Reach international
ISSN 1542-4766
Volume 13
Number 3
Page Range 381 - 420
Date 2015
Abstract Text We develop a measure of maximum sustainable government debt for advanced economies. How much investors are willing to lend to a country's government depends on how high a primary surplus they expect that government to generate, how fast they expect the country to grow, how volatile they expect that growth to be, and how much debt they expect the government will be able to raise in the future for the purpose of servicing the debt it seeks to raise today. This last observation points to the presence of a borrowing multiplier, which raises a country's borrowing well above what it would be, absent the ability to service maturing debt out of new debt's proceeds. Present debt is sustainable when implied future debt remains bounded. A country's probability of default displays a marked asymmetry around that country's maximum sustainable debt (MSD): it increases slowly below and rapidly above. We calibrate our measure for 23 OECD countries: Korea has the highest MSD at 281% of GDP and Greece the lowest at 89%. The probabilities of default at MSD are very low, from Norway's 0.27% to Korea's 0.81%. Most countries' actual debt-to-GDP ratios in 2010 are below MSD; some countries are above; these are generally the countries that have received some form of financial support in the wake of the financial crisis.
Digital Object Identifier 10.1111/jeea.12135
Other Identification Number merlin-id:9259
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