What Really Drives Public Debt: A Holistic Approach

June 25, 2015

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Format: Chicago

Pablo Anaya, and Alex Pienkowski. What Really Drives Public Debt: A Holistic Approach, (USA: International Monetary Fund, 2015) accessed December 3, 2024

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

This paper presents a novel approach to detail the propagation of shocks to public debt. The modeling technique involves a structural vector auto-regression (SVAR) estimator with an endogenous debt accumulation equation. It explores how the main drivers of sovereign debt dynamics—the primary balance, the interest rate, growth and inflation—interact with each other. Such analysis is particularly useful for debt sustainability analysis. We find that some interactions exacerbate the impact of shocks to the accumulation of debt, while others act to stabilize debt dynamics. Furthermore, the 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.

Subject: Debt sustainability analysis, External debt, Fiscal consolidation, Fiscal policy, Fiscal stance, Monetary policy, Monetary policy frameworks, Public debt

Keywords: Accumulation equation, Debt, Debt level, Debt sustainability analysis, Euro area, Fiscal policy, Fiscal stance, Interest rates shock, Marginal interest rate, Marginal interest rate shock, Monetary policy, Monetary policy action, Monetary policy frameworks, Primary balance, Sovereign debt, Vector autoregression, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/137
Stock No:

WPIEA2015137
ISBN:

9781513591353
ISSN:

1018-5941

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