Sustainability of Local Government Sector Debt. Evidence from Monte-Carlo Simulations

  • Krzysztof Kluza Warsaw School of Economics (SGH), Department of Quantitative Economics, Madalinskiego 6/8 Street, 02-513 Warsaw
Keywords: local government, debt sustainability, interest rate increase, Monte Carlo method

Abstract

The financial standing of local governments across the European Union was strongly affected by the economic crisis. The local government sector conducted vast investment policies reaching 10.2% of all investments in the EU countries in 2010. However, at the same time its indebtedness expanded significantly. The current low interest rate environment makes the sector vulnerable to future interest rate increases. The presented research analyses the impact of several scenarios of interest rate changes in Poland on the local governments’ ability to service their current debt burdens. Simulations are conducted with the Monte Carlo method. Some scenarios indicate a high vulnerability of local governments to adverse changes in market interest rates, but only if they are combined with a reduction of sector’s operating surplus. Such an economic setup may give rise to systemic problems for the whole public sector.

Author Biography

Krzysztof Kluza, Warsaw School of Economics (SGH), Department of Quantitative Economics, Madalinskiego 6/8 Street, 02-513 Warsaw
Adjunct Professor

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Published
2016-01-02
Section
Articles