What Really Drives Public Debt: A Holistic Approach
IMF Working Papers, June 25, 2015
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Bibliographic details
- Authors: Pablo Anaya, Alex Pienkowski
- Published: June 25, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513591353.001
Summary
- Paper presents a novel approach to detail the propagation of shocks to public debt.
- Modeling technique involves a structural vector auto-regression (SVAR) estimator with an endogenous debt accumulation equation.
- Explores interactions among the main drivers of sovereign debt dynamics—the primary balance, the interest rate, growth and inflation—and how these interactions affect debt dynamics.
- Analysis is particularly useful for debt sustainability analysis.
- Some interactions exacerbate the impact of shocks to the accumulation of debt, while others act to stabilize debt dynamics.
- Choice of monetary policy regime plays an important role in these debt dynamics—countries with constrained monetary policy are more at risk from changes in market sentiment and must rely much more on fiscal policy to constrain debt.
Methodology
- Structural vector auto-regression (SVAR) estimator used with an endogenous debt accumulation equation.
- Focus on how primary balance, interest rate, growth, and inflation interact with each other within the SVAR framework.
Major Findings
- Interactions among the primary balance, interest rate, growth, and inflation can either:
- Exacerbate the impact of shocks to debt accumulation, or
- Act to stabilize debt dynamics.
- Monetary policy regime matters:
- Countries with constrained monetary policy are more at risk from changes in market sentiment.
- Such countries must rely much more on fiscal policy to constrain debt.
Policy Implications
- Debt sustainability analysis should account for endogenous interactions among fiscal and macroeconomic drivers, not treat drivers as independent.
- Monetary policy frameworks influence vulnerability to market sentiment; thus, coordination between monetary and fiscal policy is critical where monetary policy is constrained.
- Fiscal policy plays a larger stabilizing role in environments with constrained monetary policy.
Key Information
- Authors: Pablo Anaya, Alex Pienkowski
- Date: June 25, 2015
- Pages: 25
- Volume: 2015
- Issue: 137
- Series: Working Paper No. 2015/137
- DOI: https://doi.org/10.5089/9781513591353.001
- Stock No: WPIEA2015137
- ISBN: 9781513591353
- ISSN: 1018-5941
IMF Working Paper — What Really Drives Public Debt: A Holistic Approach (Pablo Anaya, Alex Pienkowski), June 25, 2015.