Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks
IMF Working Papers, September 1, 2012
Source details
- Canonical URL
- Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks
Other formats
Bibliographic details
- Authors: Fuad Hasanov, Reda Cherif
- Published: September 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475510553.001
Summary findings
- The paper studies 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.
- 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 the authors’ specification, the debt ratio is stationary; a VAR excluding debt may imply an explosive debt path.
Econometric specification and scenarios
- Method: Vector autoregression (VAR) with debt feedback.
- Comparative specification note: VAR excluding debt can produce an explosive debt path, whereas including debt yields stationarity in the debt ratio.
- Scenarios analyzed:
- Fiscal austerity shock (normal times vs. weak economic environment).
- Inflation shock.
- Positive growth shock.
Policy implications and interpretation
- Austerity measures can reduce the debt ratio initially but may not produce a statistically significant long-term decline in the baseline specification.
- Policymakers should be cautious implementing austerity in weak economic environments because the probability of self-defeating outcomes is elevated.
- Inflation provides only a transient and modest reduction in the debt ratio.
- Policies that promote positive growth have a clear and unambiguous effect in lowering the debt ratio.
Keywords and themes
- Debt sustainability analysis, Econometric analysis, External debt, Fiscal policy, Fiscal stance, Inflation, Prices, Public debt, Vector autoregression
- Specific tags used by the authors: austerity shock, baseline debt ratio, debt dynamics, debt feedback, debt impulse responses, debt ratio decline, debt reduction, Debt sustainability analysis, fiscal policy, Fiscal stance, Global, impulse responses, Inflation, inflation shock, Public debt, VAR, Vector autoregression, WP
Source: Fuad Hasanov and Reda Cherif, "Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks" (IMF Working Paper, September 1, 2012).
Content in this bundle
- 1. Descriptive Statistics