IMF Working Papers

Maximum Sustainable Debt Across Countries: An Assessment using P-Theory

By Yongquan Cao, Wei Jiang, Waikei Raphael Lam, Neng Wang

October 31, 2025

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Yongquan Cao, Wei Jiang, Waikei Raphael Lam, and Neng Wang. "Maximum Sustainable Debt Across Countries: An Assessment using P-Theory", IMF Working Papers 2025, 223 (2025), accessed November 2, 2025, https://doi.org/10.5089/9798229028820.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper provides a parsimonious yet tractable approach to evaluating maximum sustainable debt across countries and over time within the p-theory framework developed by Jiang et al. (2024). By incorporating tax distortions, asset-pricing components (risk-free rates, convenience yields, and jump-risk premia), and sovereign default risks into the model, we calibrate it for a large sample of over 170 countries. Our illustrative findings show that while current debt levels in many economies remain within maximum sustainable debt levels, debt burdens in many emerging markets and low-income countries are near their respective sustainable levels. In contrast, a few countries that are in—or at high risk of—debt distress have debt levels exceeding their sustainable thresholds. The analysis highlights how sustainable debt estimates evolve over time in response to shifts in financial conditions and macro-fiscal fundamentals. These estimates are particularly sensitive to key parameters—most notably when interest-growth differentials are narrow.

Subject: Debt default, Debt service, Debt sustainability, Expenditure, External debt, Public debt

Keywords: Asset pricing, Convenience yields, Debt carrying capacity, Debt default, Debt limit, Debt service, Debt sustainability, Global, Maximum sustainable debt, Risk premium

Publication Details

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