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What Really Drives Public Debt: A Holistic Approach

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  • Pablo Anaya
  • Alex Pienkowski

Abstract

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.

Suggested Citation

  • Pablo Anaya & Alex Pienkowski, 2015. "What Really Drives Public Debt: A Holistic Approach," IMF Working Papers 2015/137, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/137
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    References listed on IDEAS

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    Cited by:

    1. van Riet, Ad, 2018. "Financial repression and high public debt in Europe," Other publications TiSEM 3391dd73-357a-4071-825c-7, Tilburg University, School of Economics and Management.
    2. Constance de Soyres & Anna Rogantini Picco & Miss Randa Sab, 2019. "Debt Build-up in Frontier Low-Income Developing Countries (LIDCs) since 2012: Global or Country-specific Factors and Way Forward?," IMF Working Papers 2019/037, International Monetary Fund.
    3. Makun, Keshmeer, 2021. "External debt and economic growth in Pacific Island countries: A linear and nonlinear analysis of Fiji Islands," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).

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