However, all such debt sustainability assessments are highly conditional and prone to a wide range of risks. Unanticipated international or domestic shocks could change the dynamics of what was previously considered a sustainable scenario. Meaningful sustainability assessments should therefore incorporate relatively unfavourable assumptions about the development of key economic factors, such as GDP growth, interest rates, exchange rates and commodity prices.
Engen, Laubach, and Reifschneider (2015) argue that the Federal Reserve’s time-based guidance initiated in August 2011 was highly effective in inducing market participants to change their beliefs about the Committee’s reaction function and to regard monetary policy as more accommodative. Using Blue Chip survey data, the authors estimate that the perceived weight on resource slack roughly doubled between March 2011 and March 2012.