Template-Type: ReDIF-Paper 1.0
Author-Name: Enrique Alberola-Ila
Author-X-Name-First: Enrique
Author-X-Name-Last: Alberola-Ila
Author-Name: Gong Cheng
Author-X-Name-First: Gong
Author-X-Name-Last: Cheng
Author-Name: Andrea Consiglio
Author-X-Name-First: Andrea
Author-X-Name-Last: Consiglio
Author-Name: Stavros A. Zenios
Author-X-Name-First: Stavros A.
Author-X-Name-Last: Zenios
Title: Debt sustainability and monetary policy: the case of ECB asset purchases
Abstract: We incorporate monetary policy into a model of stochastic debt sustainability analysis and evaluate the impact of unconventional policies on sovereign debt dynamics. The model optimizes debt financing to trade off financing cost with refinancing risk. We show that the ECB pandemic emergency-purchase programme (PEPP) substantially improves debt sustainability for euro area sovereigns with a high debt stock. Without PEPP, debt would be on an increasing (unsustainable) trajectory with high probability, while, with asset purchases, it is sustainable and the debt ratio is expected to return to pre-pandemic levels by about 2030. The improvement in debt dynamics extends beyond the PEPP and is larger for more gradual unwinding of the Central Bank balance sheet. Optimal financing under PEPP induces an extension of maturities reducing the risk without increasing costs. The analysis also shows that inflation surprises have relatively little impact on debt dynamics, with the direction and magnitude of the 
effect depending on the monetary policy response.
Length: 37 pages
Creation-Date: 2022-07
File-URL: https://www.bis.org/publ/work1034.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1034.htm
File-Format: text/html
Number: 1034
Keywords: debt sustainability analysis, risk management, unconventional monetary policy, monetary-fiscal mix, PEPP, CVaR optimisation
Classification-JEL: E52, H63, H68
Handle: RePEc:bis:biswps:1034