When is debt sustainable

Abstract

This paper proposes indicators to assess government debt sustainability. Sustainable government finances can be achieved via three main channels: fis-cal responses, economic growth and financial repression. The fiscal response provides information on the long-term country specific attitude towards fiscal sustainability and is estimated using Bohn (2008)’s approach. We combine the estimated fiscal response with a stochastic debt simulation and calculate the probability of debt-to-GDP ratios rising above some threshold. This is applied on historical data for seven OECD countries. In particular, the probability of debt-to-GDP ratios rising by more than 20 % in the next decade clearly iden-tifies countries that have sustainability concerns: Spain, Portugal and Iceland, from those that do not: US, UK, Netherlands and Belgium.