A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data

24 Pages Posted: 15 Mar 2004 Last revised: 30 Sep 2022

See all articles by Marcio G. P. Garcia

Marcio G. P. Garcia

Pontifical Catholic University - Department of Economics

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: March 2004

Abstract

In this paper we study the question of debt sustainability from a risk management perspective. The debt accumulation equation for any country involves variables that are stochastic and closely intertwined. When these aspects are taken into consideration the notion of debt sustainability is expanded to studying the stochastic properties of the debt dynamics. We illustrate the methodology by studying the Brazilian case. We find that even though the debt could be sustainable in the absence of risk, there are paths in which it is clearly unsustainable. Furthermore, we show that properties of the debt dynamics are closely related to the spreads on sovereign dollar denominated debt.

Suggested Citation

Garcia, Marcio G. P. and Rigobon, Roberto, A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data (March 2004). NBER Working Paper No. w10336, Available at SSRN: https://ssrn.com/abstract=515229

Marcio G. P. Garcia

Pontifical Catholic University - Department of Economics ( email )

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Roberto Rigobon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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United States
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