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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.

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Short and variable lags

Monetary policy shocks impact economy with variable short and long lags. Consumption reacts fast but fluctuates, sales drop deeper, and employment falls consistently. Low-frequency data hides short lags.

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An unconventional collaboration

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

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Debt crises, fast and slow

Dynamic model: Economy faces belief-driven slow crises at intermediate debt, rollover crises at low & high debt. Countercyclical deficits better than debt reduction. In recession, governments deleverage near crisis threshold. Long bond maturities curb rollover, not slow crises.

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