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Public Debt Dynamics

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Author Info

  • Fuad Hasanov
  • Reda Cherif

Abstract

We study 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. Yet, 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 our specification, the debt ratio is stationary, whereas a VAR excluding debt may imply an explosive debt path.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/230.

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Length: 28
Date of creation: 01 Sep 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/230

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Related research

Keywords: Public debt; Economic growth; Economic models; External shocks; Fiscal consolidation; debt ratio; fiscal policy; debt dynamics; primary deficit; debt reduction; debt buildup; fiscal balance; fiscal stimulus; primary balance ratio; fiscal reaction; tax changes; government spending; government debt; fiscal adjustment; debt sustainability; fiscal policies; expansionary fiscal; fiscal multipliers; fiscal pressures; sovereign bond; expansionary fiscal policies; fiscal deficits; fiscal stance; fiscal reaction functions; deficit financing; fiscal sustainability; debt maturity; fiscal reaction function; national budget; government spending shocks; domestic growth; fiscal austerity; stock of debt;

References

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  3. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Gustav A. Horn & Fabian Lindner & Silke Tober & Andrew Watt, 2012. "Quo vadis Krise? Zwischenbilanz und Konzept für einen stabilen Euroraum," IMK Report 75-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Gnegne, Yacouba & Jawadi, Fredj, 2013. "Boundedness and nonlinearities in public debt dynamics: A TAR assessment," Economic Modelling, Elsevier, vol. 34(C), pages 154-160.
  3. Gustav A. Horn & Fabian Lindner & Silke Tober & Andrew Watt, 2012. "Where now for the euro area crisis? Interim assessment and a model for a stable euro area," IMK Report 75e-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  4. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
  5. Argentino Pessoa, 2013. "Regional integration and the euro crisis: problems and solutions," ERSA conference papers ersa13p1153, European Regional Science Association.

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