Research project

Debt Sustainability: Towards a New Blueprint for a Comprehensive Study of Debt Crises

Given the high levels of debt accumulated through the pandemic and the War in Ukraine, debt sustainability will be a key issue inboth advanced and developing countries, weighing on policymaking and growth for years to come. Despite the rich literature on the topic, existing models fall short of providing reasonable explanationsof the varieties of crises we observe historically. As a contribution towards the construction of a multi-disciplinary agenda on debt, this project aims to develop a general, comprehensive framework for empirical and policy analysis of debt sustainability, encompassing many leading models as special cases.

Short and variable lags

We study the transmission of monetary policy shocks using daily consumption, corporate sales and employment series. We find that the economy responds at both short and long lags that are variable in economically significant ways. Consumption reacts in one week, reaches a local trough in one quarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but the initial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for five quarters albeit with a smaller impact reaction. We show that these short lags are masked by time aggregation at lower —quarterly— frequencies.

An unconventional collaboration

Sometimes monetary and fiscal authorities need to break the rules and act together.

Debt crises, fast and slow

We build a dynamic model where the economy is vulnerable to belief-driven slow moving debt crises at intermediate debt level, and rollover crises at both low and high debt levels. Vis-à-vis the threat of slow-moving crises, countercyclical deficits generally welfare-dominate debt reduction policies. In a recession, optimizing governments only deleverage if debt is close to the threshold below which belief-driven slow-moving crises can no longer occur. The welfare benefits from deleveraging instead dominate if governments are concerned with losing market access even at low debt levels. Long bond maturities may fully eliminate belief-driven rollover crises but not slow-moving ones.