When's the holiday over? Assessing the sustainability of local government debt in Sweden

Abstract: Swedish local governments are emerging from an era of low indebtness after the Swedish financial crisis in the 1990s preceded the creation of a comparatively robust, rules-based macro-prudential framework. Yet, the persistently low interest rates observed since 2008 have allowed an accelerating debt accumulation under those frameworks, pre-empting questions of debt sustainability should interest rates reverse. The present thesis develops a forecasting methodology based on vector auto-regression models and contingent sustainability conditions in order to answer the research question "are Swedish municipalities on a sustainable debt path?". In so doing, it attempts three contributions. Firstly, it extends a methodology previously used for Greece (Zettelmeyer et al., 2017) to fit the panel dimension of local governments, in general, and the institutional setting in Sweden, in particular. Secondly, it produces results that chime into the empirical literature and wider debate around local government debt in Europe. Thirdly, it makes cautious observations surrounding the significant devolution of power in Sweden and the structural factors underlying differences in debt accumulation between different types of municipalities. Results suggest that all but a handful of municipalities are on sustainable debt paths. However, the structural break in 2008 and general robustness issues require that results are interpreted with care.