Debt Sustainability in Emerging Market Countries: A 'Fan Chart' Approach
46 Pages Posted: 15 Feb 2012
Date Written: March 30, 2006
The paper by Debrun, Celasun and Ostry focuses on the assessment of debt sustainability and stresses the need to overcome one of the main drawbacks of debt sustainability analysis, i.e. the fact that it is usually based on a deterministic approach in which uncertainty is dealt with by simulating alternative scenarios in which only one key variable at a time is hit by an adverse shock. The paper proposes a methodology that improves the understanding of the risks surrounding debt dynamics and acknowledges the probabilistic nature of debt sustainability analysis exercises. The approach, which preserves a certain degree of standardization while allowing for country-specific risk factors, uses estimates of the joint probability distributions of economic shocks to construct a large number of scenarios capturing covariances among disturbances and the dynamic response of the economy. The methodology provides for fiscal policy to adjust to shocks according to a pattern observed in emerging market economies and to be itself a source of risk. The proposed assessment of debt sustainability is probabilistic and can help policy makers to: capture country-specific features relevant for debt dynamics; have clearer signals of the risks from delaying fiscal adjustment or undertaking fiscal expansions; and improve medium-term fiscal planning given the more complete information on the debt risk profile.
Suggested Citation: Suggested Citation