De Economist

, Volume 160, Issue 3, pp 219–236 | Cite as

Assessing Debt Sustainability in a Stochastic Environment: 200 Years of Dutch Debt and Deficit Management

Open Access
Article

Abstract

When debt levels approach critical levels, tax payers may revolt against the associated debt service burden. Funding problems may arise in capital markets when lenders anticipate such revolts and refuse to participate in debt auctions. We provide a stochastic framework to assess whether such problems may arise and argue that the key to fiscal sustainability in a stochastic environment is a feedback rule from debt level shocks back to corresponding adjustments in the primary surplus. We show that such feedback rules narrow future distributions of debt–output ratios and so reduce crisis probabilities. We apply the methodology to Dutch debt and deficit data spanning two centuries. Our results strongly argue for the incorporation of rules stipulating tightening fiscal policy whenever debt stocks exceed previously agreed upon targets (like in the original Eurozone Stability pact).

Keywords

Deficits Debt sustainability Fiscal rules 

JEL Classification

E62 H62 H63 H68 

Notes

Acknowledgments

Sweder van Wijnbergen and Alexander France are indebted to the Netherlands Bureau of Policy Analysis (CPB) for providing access to sources and to Jasper Lukkesen (CPB) for research assistance.

Open Access

This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.

Supplementary material

10645_2012_9188_MOESM1_ESM.pdf (105 kb)
ESM 1 (PDF 105 kb)

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Copyright information

© The Author(s) 2012

Authors and Affiliations

  1. 1.University of Amsterdam and Tinbergen InstituteAmsterdamThe Netherlands
  2. 2.University of AmsterdamAmsterdamThe Netherlands

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