Implicit public debt thresholds: An operational proposal

2020

Abstract Gauging the public debt-to-GDP ratio a country can sustain in the medium-run without putting fiscal sustainability at risk is a question of key relevance for policy-makers. Deviations from a safe level of debt should be watched over in order to take corrective measures. In this paper we make a proposal for an operational characterization of the “prudent debt level”. To do so, we use standard methods based on Vector Autoregressions to compute the probability that the public debt ratio exceeds a given threshold, using the Spanish case as an example. The resulting probabilities are highly and positively correlated with market risk assessment, measured by the spread with respect to the…