Hostland, DougKaram, Philippe2012-06-222012-06-222006-01https://hdl.handle.net/10986/8800The authors apply stochastic simulation methods to assess debt sustainability in emerging market economies and provide probability measures for projections of the external and public debt burden over the medium term. The vulnerability of public debt to adverse shocks is determined by a number of interrelated factors, including the volatility of output, financial fragility, the endogenous response of the risk premium, and sudden stops in private capital flows. The vulnerability of external debt is sensitive to the determination of the exchange rate and to the pricing of traded goods. The authors show that fiscal policy can act in a preemptive manner to prevent the debt burden from rising significantly over the medium term. This requires flexibility in fiscal planning, which many emerging market economies lack. Emerging market economies therefore face a difficult tradeoff between managing the risk of a debt crisis and pursuing other important fiscal policy objectives.CC BY 3.0 IGOACCOUNTINGADVANCED COUNTRIESADVERSE SHOCKSAGGREGATE DEMANDASSET PRICESAUTOREGRESSIONBENCHMARKBONDSBORROWINGBUSINESS CYCLECAPITAL ACCOUNTCAPITAL FLOWSCAPITAL INFLOWSCAPITAL MARKETSCREDIT RATINGCREDITORSCURRENCY CRISESCURRENT ACCOUNTCURRENT ACCOUNT ADJUSTMENTSCURRENT ACCOUNT BALANCECURRENT ACCOUNT BALANCESCURRENT ACCOUNT DEFICITCURRENT ACCOUNT REVERSALSDEBTDEBT BURDENDEBT BURDENSDEBT CRISISDEBT DEFAULTDEBT DYNAMICSDEBT INTOLERANCEDEBT LEVELDEBT MANAGEMENTDEBT MARKETSDEBT OBLIGATIONSDEBT RESCHEDULINGDEBT SERVICEDEBT SERVICE BURDENDEBT SERVICE PAYMENTSDEBT STOCKSDEBT SUSTAINABILITYDEBTORDEBTOR REPORTINGDEBTOR REPORTING SYSTEMDEBTORSDEFAULT RISKDEFAULTSDEVALUATIONDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDISCOUNTED VALUEDISTORTIONARY TAXESDOMESTIC CURRENCYDOMESTIC DEBTECONOMIC GROWTHECONOMIC OUTCOMESECONOMIC OUTLOOKECONOMIC STRUCTUREEMERGING MARKET ECONOMIESEMPIRICAL EVIDENCEEMPIRICAL STUDIESENDOGENOUS VARIABLESEXCHANGE RATEEXCHANGE RATE DEPRECIATIONEXCHANGE RATESEXPORTSEXTERNAL DEBTEXTERNAL DEBT BURDENFINANCIAL CRISESFINANCIAL FRAGILITYFISCAL POLICYFOREIGN CURRENCYFUTURE RESEARCHGDPGROWTH RATEINCOMEINFLATIONINFLATION TARGETINGINTEREST RATEINTEREST RATESINTERNATIONAL FINANCELIQUIDITYLIQUIDITY CRISESLOCAL CURRENCYLONG TERMLOW-INCOME COUNTRIESMACRO MODELSMACRO POLICIESMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC VOLATILITYMATURITY STRUCTURE OF DEBTMIDDLE INCOME COUNTRIESMIDDLE-INCOME COUNTRIESMONETARY POLICYNOMINAL INTEREST RATEOPEN ECONOMIESOPEN ECONOMYOUTPUT GROWTHOUTPUT VOLATILITYPOLICY INSTRUMENTSPOLICY RESEARCHPRIMARY SURPLUSPRIVATE SECTORPUBLIC DEBTREAL EXCHANGEREAL GDPREAL INTERESTREAL INTEREST RATEREFINANCERESERVE MANAGEMENTRISK PREMIUMSERIAL DEFAULTERSSOLVENCYSOVEREIGN DEBTSTABLE INFLATIONSTANDARD DEVIATIONSTATISTICAL ANALYSISSTRUCTURAL REFORMSTAX REVENUESTRADE BALANCETRADE SHOCKSWorld Bank10.1596/1813-9450-3821