Illuminating budgetary risks: The role of stress testing

The increased vulnerability of government finances in many countries underlines the importance of public risk management. We apply a specific risk management tool – stress testing – to public finances. After presenting a general framework for stress testing government finances, we illustrate its application for the case of the Netherlands. Our analysis indicates that high levels of contingent liabilities call for sufficient shock absorption capacity in public finances. JEL classification: E62, H63 Keywords: Fiscal policy, public debt, stress test, risk management, budgetary sensitivity, implicit and explicit guarantees, Netherlands