A Risk-Based Debt Sustainability Framework: Incorporating Balance Sheets and Uncertainty
27 Pages Posted: 18 Feb 2008
Date Written: February 2008
This paper proposes a new framework for the analysis of public sector debt sustainability. The framework uses concepts and methods from modern practice of contingent claims to develop a quantitative risk-based model of sovereign credit risk. The motivation in developing this framework is to provide a clear and workable complement to traditional debt sustainability analysis which-although it has many useful applications-suffers from the inability to measure risk exposures, default probabilities and credit spreads. Importantly, this new framework can be adapted for policy analysis, including debt and reserve management.
Keywords: Risk management, Public sector, Public debt, Reserve management policy
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