TY - JOUR
AU - Blanchard, Olivier J
AU - Das, Mitali
TI - A New Index of Debt Sustainability
JF - National Bureau of Economic Research Working Paper Series
VL - No. 24068
PY - 2017
Y2 - November 2017
DO - 10.3386/w24068
UR - http://www.nber.org/papers/w24068
L1 - http://www.nber.org/papers/w24068.pdf
N1 - Author contact info:
Olivier J. Blanchard
Peterson Institute for International Economics
1750 Massachusetts Avenue, NW
Washington, DC 20036
Tel: 202/328-9000
Fax: 202/659-3225
E-Mail: oblanchard@piie.com
Mitali Das
International Monetary Fund
700 19th Street NW
Washington, DC 20431
E-Mail: mdas@imf.org
AB - Debt sustainability is fundamentally a probabilistic concept: Debt is rarely sustainable with probability one. We propose an index of external debt sustainability that reflects this uncertainty. Namely we construct the index as the probability that, at the current exchange rate, net external debt is equal to or less than the present value of net exports. Constructing this index involves three steps: (1) deriving the distribution of the present value of net exports at the current exchange rate; (2) deriving the distribution of exchange rates associated with the condition that, for each realization, the present discounted value of net exports is at least equal to the value of current net debt; and (3) assessing where the current exchange rate stands in the distribution of exchange rates and thus the probability that debt is sustainable. Having shown how this can be done, we then compute the index for two countries, the United States and Chile. Our main conclusion is the large degree of uncertainty implied by the presence of large gross asset and liability positions, together with uncertainty about rates of return on these assets and liabilities. The size of the distribution of exchange rate adjustments implies that one should be careful in concluding that debt is or is not sustainable at the current exchange rate and that strong measures are potentially needed to reestablish sustainability. Exchange rates that appear overvalued in the baseline may still imply a reasonably high probability that debt is sustainable at the current exchange rate; symmetrically, exchange rates that appear undervalued in the baseline may still come with a reasonably low probability that debt is unsustainable at the current exchange rate.
ER -