Assessing Debt Sustainability: modelling challenges and the way forward

Conference proceedings

Debt sustainability assessment is moving away from backward-looking methodologies with hard thresholds. Forward-looking assessments are becoming more prominent. They try to incorporate not only forecasts, but also policy decisions, and ultimately the reaction functions of households, markets, and fiscal and monetary policy authorities. This necessitates the use of structural models, and the ensuing trade-off between a simplistic but clear assessment on hand, and a nuanced but more realistic assessment on the other.

However, there is a role for backward-looking assessments based on Stochastic Debt Sustainability Analysis (SDSA) models that draw from joint distributions of variables to generate fan charts. The shape and positioning of the charts around the baseline can help hold forecasts up to a reality check and assess risks to debt sustainability. 

The seminar will bring together debt sustainability experts from policy institutions and academia and explore how to combine forward- and backward-looking criteria to assess debt sustainability. The seminar will also focus on the challenges and policy implications of debt sustainability assessment for national governments and European institutions.

Questions to address

• How can we incorporate policy expectations and interactions in our DSA thinking?
• How can we better judge the direction of risks from SDSA models?
• How can structural and SDSA models be combined?
• What can they tell us about fiscal policy

Seminar Setup

• In person, at the ESM premises
• Two parts: 
  • The morning sessions: technical presentations of analytical work and methodologies 
  • The afternoon session: panel discussion on the challenges of combining the stochastic and DSGE approaches
• Presenters: senior policy makers and researchers