Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks

Author/Editor:

Fuad Hasanov ; Reda Cherif

Publication Date:

September 1, 2012

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We study how macroeconomic shocks affect U.S. public debt dynamics using a VAR with debt feedback. Following a fiscal austerity shock, the debt ratio initially declines and then returns to its pre-shock path. Yet, the effect is not statistically significant. In a weak economic environment, the likelihood of a self-defeating austerity shock is much higher than in normal times. An inflation shock only slightly reduces the debt ratio for a few quarters. A positive growth shock unambiguously lowers debt. In our specification, the debt ratio is stationary, whereas a VAR excluding debt may imply an explosive debt path.

Series:

Working Paper No. 2012/230

Subject:

Debt sustainability analysis Econometric analysis External debt Fiscal policy Fiscal stance Inflation Prices Public debt Vector autoregression

English

Publication Date:

September 1, 2012

ISBN/ISSN:

9781475510553/1018-5941

Stock No:

WPIEA2012230

Pages:

28

Please address any questions about this title to publications@imf.org