https://doi.org/10.52903/wp2025338
STOCHASTIC DEBT SUSTAINABILITY ANALYSIS:
A METHODOLOGICAL NOTE
Dimitrios Papaoikonomou
Bank of Greece
ABSTRACT
This paper mainly focuses on the approach taken at the Bank of Greece regarding the application of stochastic methods to debt sustainability analysis, providing also a discussion of alternative options. Caution is advised in the way that stochastic methods are made operational, as they are far from exact and rely on assumptions of various degrees of plausibility, which are often not stated explicitly. A Monte Carlo exercise reveals that under the approach taken by the European Commission, the measurement of dispersion can be subject to significant bias, ranging from an over-estimation by 45% to an under-estimation in excess of 80%, depending on the time-series properties of the data.
JEL-classifications: H68, C53
Keywords: Debt sustainability, stochastic simulations
Acknowledgements: I have benefited from bilateral discussions with D. Papageorgiou and D. Louzis, as well as with other participants at an internal presentation at the Bank of Greece Economic Analysis and Research Department on March 4th 2024. I am also very grateful to the participants and organizers of the WGPF workshop on SDSA on October 9th 2024 at the ECB. I am most grateful to D. Louzis for very constructive comments on an earlier draft. Any remaining errors are my own.
Disclaimer: The views presented are those of the author and do not necessarily reflect the views of the Bank of Greece.
Corresponding author:
Dimitrios Papaoikonomou
Economic Analysis and Research Department
Bank of Greece
21, E. Venizelos Avenue
Athens 102 50, Greece
Tel.: +30-2103203827
email: dpapaoikonomou@bankofgreece.gr