Public Debt Stock Sustainability in Selected OECD Countries

Among the different criteria used for testing sustainability of public debt, the econometric approach determines whether a government is able to sustain its budget deficits without defaulting on its debt. In this contribution, by linking three different motives proposed respectively by Trehan and Walsh (1991), Hakkio and Rush (1991) and Bohn (1995), we develop a compact step-wise test algorithm and apply that to the European economies, including the PIIGS countries and Turkey. Secondly, we introduce phase-space reconstruction methodology in order to locate the path for debt dynamics, which enables us to observe fiscal policy implications in short and medium-term. We conclude that most economies are characterized by sustainable debt policies with the exception of Greece, Ireland, Portugal, Spain, and possibly United Kingdom. For the latter country, while the outcome of test algorithm indicates the sustainability of debt policy, phase-space examination shows that the reaction of the government to diverging debt stock GDP ratio cannot be sufficient to stabilize the path for debt dynamics.