Author(s): Jan in 't Veld, Andrea Pagano, Marco Ratto, Werner Roeger, Istvan P. Szekely, European Commission
This paper proposes a framework for sovereign debt sustainability assessment based on an estimated DSGE model. One advantage of this is that it allows taking into account feedback effects of debt ratios, spreads and fiscal measures on growth and tax bases, and thus capture the impact of changes in the composition of GDP which is pronounced during fiscal consolidation. Unsustainable debt developments may give rise to increasing interest rate spreads which could further reduce growth and tax revenue and worsen debt dynamics, while fiscal austerity measures are likely to reduce growth and lower tax revenues in the short run. Capturing the impact of risk premium on growth and public debt dynamics is crucial to understand current developments and policy trade-offs in euro area periphery countries.
|ISBN 978-92-79-22987-9 (online)|
|doi: 10.2765/27393 (online)|
Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.