Debt Sustainability in a Low Interest Rate World; Dmitriy Sergeyev (Bocconi University)

Abstract

Historic levels of public debt and conditions of r < g for advanced economies have prompted a reassessment of debt sustainability. Using a continuous-time model in which the debt-to-GDP ratio is stochastic and r < g on average, we find that theoretical conditions for sustainability are not closely tied to common metrics of sustainability: the level of debt or whether r < g. However, when the primary surplus is bounded, a state-dependent threshold level of public debt determines sustainability. Secular stagnation factors like slow population growth, low productivity growth, or higher output risk carry differing implications for debt sustainability.

Click here to view the paper.