PART 5
The fiscal response to the COVID crisis increased debt in many countries. As we emerge from this crisis many are worried if current debt levels are sustainable. In this exercise, we will use data from Country X to undertake a debt sustainability analysis. use the excel template provided to answer the following questions. Also copy and paste each answer onto this word document and submit as pdf
a
Assume that in the steady state the real interest rate is = 3.5% and the real growth rate is = 2%. Calculate the primary surplus that, in steady state, will deliver a sustainable debt of 99% of GDP (as in 2020). What about for a 78% debt-to-GDP ratio (as in 2016)? Explain the difference.
b
Suppose policymakers decide that the primary budget surplus (deficit) will be 1.2% from 2021 to 2030. Calculate and plot the debt dynamics given a constant real interest rate r = 3.5% and real growth rate g = 2%. Is debt sustainable under this plan? Explain how your answer compares to that of Part 1. What should the primary surplus be from 2021 to 2030 so that debt-to-GDP levels in 2030 are same as in 2016?
c
So far we have only considered the case of a constant macro variables. Assuming policymakers maintain a primary surplus of 1.2% of GDP, use the macro forecasts provided in Table 1 (and in the Excel Spreadsheet) to plot the debt dynamics for the following cases:
5% of debt is denominated in foreign currency
(ii) 30% of debt is denominated in foreign currency
