How to Test for Debt Sustainability? Some Theoretical Reflections on an Empirical Test

9 Pages Posted: 13 Sep 2013

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: September 2013

Abstract

Testing the reaction of the primary surplus to variations in public debt, relative to GDP respectively, has been frequently resorted to in order to test for sustainability of a given debt policy. In this contribution, we analyze theoretically under which condition a positive reaction of the primary surplus to variations in debt implies a sustainable debt policy. We demonstrate that the evolution of the debt to GDP ratio plays a decisive role as concerns the validity of the test outcome. In addition, we demonstrate that a positive reaction coefficient does not guarantee sustainability unless it exceeds at least the difference between the interest rate on public debt and the GDP growth grate. Thus, this test allows judgements about sustainability of public debt policies only if the interest rate and the GDP growth rate are known.

Keywords: debt sustainability, critical debt, primary surplus, reaction function

JEL Classification: H60, E62

Suggested Citation

Greiner, Alfred, How to Test for Debt Sustainability? Some Theoretical Reflections on an Empirical Test (September 2013). Bielefeld Working Papers in Economics and Management No. 17-2013, Available at SSRN: https://ssrn.com/abstract=2324678 or http://dx.doi.org/10.2139/ssrn.2324678

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

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