The Analysis of Public-Debt Sustainability



Enrique Mendoza (University of Pennsylvania)



4 – 8 September 2017



9:30 to 13:00

Intended for


Researchers from academic and policy institutions interested in macroeconomics, international macroeconomics, and public finance.



Participants should have a solid background in advanced macroeconomics, at the level of a first-year doctoral course or in line with the contents of the Ljungvist-Sargent textbook (Recursive Macroeconomic Theory). Familiarity with computational methods and intermediate time-series econometrics will also be helpful.



Public-debt ratios in many advanced economies have risen sharply since the Global Financial Crisis. In the United States, they are at record-high levels comparable only to those observed at the end of World War II. In other key advanced economies, particularly inside the European Union, the spectrum of sovereign default continues to be present despite the belief that the worst of the European Debt Crisis has passed. In addition, in most advanced economies large unfunded liabilities from transfer programs make the effective obligations of governments much larger than standard debt-GDP ratio estimates. Paradoxically, while these facts suggest that the fiscal situation in many advanced economies is very fragile, the global demand for public-debt instruments, or so-called safe assets, has remained very strong, producing very high bond prices and even negative yields, and thus giving some weight to arguments favoring fiscal expansions and additional debt issuance.

Against this background, the canonical question of what is a sustainable public debt takes center stage. This course aims to provide an answer by reviewing key elements of the classic and recent literatures on public-debt sustainability and exploring the predictions that various quantitative tools produce when applied to the current situation of advanced economies.



Review of fiscal solvency conditions and three approaches to debt sustainability
Empirical approach: Bohn's Fiscal Reaction Functions
Application of the empirical approach to U.S. data and panels of advanced and emerging economies
Structural dynamic general equilibrium approach: Two-country model
Application calibrated to U.S. and European data: Can tax increases make the higher debts sustainable?
Domestic sovereign default approach: Optimal default as a tool for redistribution
Application calibrated to data for Spain: Why are domestic defaults very infrequent?
Understanding the global demand for public debt: The role of financial integration, financial underdevelopment and fiscal needs

Sponsored by


Autoridad Independiente de Responsabilidad Fiscal (AIReF)


Enrique G. Mendoza is Presidential Professor of Economics and Director of the Penn Institute for Economic Research at the University of Pennsylvania, where he joined in 2013. Before that, he was Neil Moskowitz Professor of Economics at the University of Maryland, and held positions at the International Monetary Fund, the Board of Governors of the Federal Reserve System and Duke University. He is a 1989 PhD from the University of Western Ontario, a Research Associate of the NBER, and member of the BIS Advisory Panel and of the Latin American Shadow Financial Regulatory Committee. He has served as panel member of the NSF Economics program and in the editorial boards of several journals, including the American Economic Review. His research focuses on international capital flows, financial crises, sovereign debt and international business cycles. He has published in top journals like the Quarterly Journal of Economics, American Economic Review or the Journal of Political Economy.


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