WP 2-21

Standard analyses of debt sustainability are based on the conventional notion of  interest costs. We propose an alternative measure — dubbed shadow interest costs — that accounts for the effects of stock-flow adjustments on the stock of debt. The two measures differ because of the relevance of active debt management: Shadow costs are far larger, more volatile, persistent, and sensitive to changes in macroeconomic conditions. As a result, while reported costs for high-debt countries are largely shielded from changes in market interest rates and debt levels, shadow costs are not. These last allow far more realistic assessments of debt sustainability than their conventional counterparts.