Stochastic Debt Sustainability Analysis for Sovereigns and the Scope for Optimization Modeling
Optimization and Engineering, Forthcoming
20 Pages Posted: 12 May 2017 Last revised: 20 Oct 2018
Date Written: May 1, 2017
Abstract
We express the opinion that sovereign debt sustainability analysis must be augmented by stochastic correlated risk factors and a risk measure to capture tail effects. Crisis situations can thus be adequately specified and analyzed with sufficient accuracy to warrant the relevance of policy decisions. In this context there is significant scope for optimization modeling for both strategic planning and operational management. We discuss diverse aspects of the problem of debt sustainability and highlight modeling approaches that can be brought to bear on the problem. Results with the fictitiuous, but nor unrealistic, Kingdom of Atlantis, which is sinking under excessive debt, illustrate the proposed models.
Keywords: Sovereign debt, sustainability analysis, risk management, stochastic programming, scenarios, VaR, CVaR
JEL Classification: C61, C63, D61, E3, E47, E62, F34, G38, H63
Suggested Citation: Suggested Citation