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).
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Bohn H. (2007) Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?. Journal of monetary Economics 54: 1837–1847
Bos, F. (2007). The Dutch fiscal framework: History, current practice and the role of the CPB, CPB document no. 150.
Davig T., Leeper E., Walker T. (2011) Inflation and the fiscal limit. European Economic Review 55–1: 31–47
Organisation for Economic Cooperation and Development (OECD) (2010). World economic outlook no. 87, Paris.
Reinhart C., Rogoff K., Savastano M. (2003) Debt intolerance. BPEA 2003(1): 1–62
Schabert, A., & van Wijnbergen, S. (2006). Debts, deficits and destabilizing monetary policy in open economies, CEPR discussion paper no 5590.
Schabert, A., & van Wijnbergen, S. (2010). Sovereign default and the stability of inflation targeting regimes, Tinbergen Institute working paper no. TI 11-064.
Trehan B., Walsh C. (1991) Testing intertemporal budget constraints: Theory and applications to US federal budget and current account deficits. Journal of Money, Credit and banking 23(2): 206–233
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.
Author information
Authors and Affiliations
Corresponding author
Electronic Supplementary Material
The Below is the Electronic Supplementary Material.
Rights and permissions
Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License (https://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
About this article
Cite this article
van Wijnbergen, S., France, A. Assessing Debt Sustainability in a Stochastic Environment: 200 Years of Dutch Debt and Deficit Management. De Economist 160, 219–236 (2012). https://doi.org/10.1007/s10645-012-9188-7
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10645-012-9188-7