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The Legacy Debt and the Joint Path of Public Deficit and Debt in the Euro Area

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  • Alberto Caruso
  • Lucrezia Reichlin
  • Giovanni Ricco

Abstract

This paper studies the joint dynamics of public debt and public deficit in the euro area for the period 1981-2013 and computes projections up to 2020. We show that, since 2009, public debt and public deficit have been negatively related. On the basis of a counter-factual simulation that conditions on past correlations with a large number of macroeconomic indicators and the observed GDP path since 2008 we find that the negative relation is anomalous with respect to previous historical experience. In contrast, private savings and private debt since 2008 have behaved in line with past experience. We define and estimate the “legacy debt” of the 2008 crisis and show that, if GDP and inflation will behave according to the International Monetary Fund (IMF) projection, by 2020 it will still account for 15% of total public debt.

Suggested Citation

  • Alberto Caruso & Lucrezia Reichlin & Giovanni Ricco, 2015. "The Legacy Debt and the Joint Path of Public Deficit and Debt in the Euro Area," European Economy - Discussion Papers 010, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:dispap:010
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    Cited by:

    1. Michael W. McCracken & Joseph T. McGillicuddy, 2019. "An empirical investigation of direct and iterated multistep conditional forecasts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(2), pages 181-204, March.
    2. De Luca, Roberto & Di Mauro, Marco & Falzarano, Angelo & Naddeo, Adele, 2017. "The effect of the behavior of an average consumer on the public debt dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 482(C), pages 357-361.

    More about this item

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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