IMF Working Papers

Public Debt Dynamics and the Impact of Fiscal Policy

By Nikhil Patel, Adrian Peralta Alva

April 26, 2024

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Nikhil Patel, and Adrian Peralta Alva. Public Debt Dynamics and the Impact of Fiscal Policy, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Public debt-to-GDP ratios have undergone substantial fluctuations over both the short and long term. Most recently, global debt-to-GDP ratios peaked at 100% on average in 2020 due to COVID-19, retracting substantially by 2022. To understand what drives these movements, we propose a structural approach to debt decompositions based on a SVAR identified with narrative sign restrictions. We find that GDP growth shocks and the corresponding comovements of macroeconomic variables are the key drivers of debt to GDP, accounting for 40% of the observed yearly variation in 17 advanced economies since the 1980s. Discretionary fiscal policy changes, in turn, account for less than 20% of the observed changes. The analysis also finds the primary balance multiplier on GDP to be very small. We reconcile our results with the literature, underscoring the importance of accurate shock identification and accounting for cross-country heterogeneity.

Subject: Econometric analysis, Fiscal consolidation, Fiscal policy, Fiscal stance, Public debt, Structural vector autoregression, Vector autoregression

Keywords: Discretionary fiscal policy change, Fiscal Consolidation, Fiscal stance, GDP growth shock, Global, Growth shock, Public Debt, Public debt dynamics, Sign restriction, Structural vector autoregression, Structural Vector Autoregression., Vector autoregression

Publication Details

  • Pages:

    50

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/087

  • Stock No:

    WPIEA2024087

  • ISBN:

    9798400273476

  • ISSN:

    1018-5941

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