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Public Debt Dynamics and Debt Feedback

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  • Reda, Cherif
  • Fuad, Hasanov

Abstract

We study the dynamics of U.S. public debt in a parsimonious VAR. We find that including debt feedback ensures the stationarity of debt while standard VARs excluding debt may imply an explosive debt path. We also find that the response of debt to inflation or interest shocks is not robust and depends on the policy regime. The recent past suggests that a positive shock to inflation increases debt while the same to interest rate decreases it. Positive shocks to growth and primary surplus unambiguously reduce debt.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27918.

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Date of creation: Dec 2010
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Handle: RePEc:pra:mprapa:27918

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Keywords: debt; fiscal policy; growth; VAR; generalized impulse responses;

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References

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  1. Hess Chung & Eric Leeper, 2007. "What Has Financed Government Debt?," Caepr Working Papers 2007-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  2. Carlo Favero & Francesco Giavazzi, 2009. "How large are the effects of tax changes?," NBER Working Papers 15303, National Bureau of Economic Research, Inc.
  3. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
  4. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
  5. J. Boissinot & C. L'Angevin & B. Monfort, 2004. "Public Debt Sustainability: Some Results on the French Case," Documents de Travail de la DESE - Working Papers of the DESE g2004-10, Institut National de la Statistique et des Etudes Economiques, DESE.
  6. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  7. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
  8. George J. Hall & Thomas J. Sargent, 2011. "Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 192-214, July.
  9. Barro, Robert J, 1980. "Federal Deficit Policy and the Effects of Public Debt Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 747-62, November.
  10. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2009. "Fiscal Stimulus with spending reversals," CEPR Discussion Papers 7302, C.E.P.R. Discussion Papers.
  11. António Afonso & Ricardo Sousa, 2011. "The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis," Portuguese Economic Journal, Springer, vol. 10(1), pages 61-82, April.
  12. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
  13. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  14. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. Vito Polito & Mike Wickens, 2007. "Measuring the Fiscal Stance," Discussion Papers 07/14, Department of Economics, University of York.
  16. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  17. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
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Cited by:
  1. Luc Eyraud & Anke Weber, 2013. "The Challenge of Debt Reduction during Fiscal Consolidation," IMF Working Papers 13/67, International Monetary Fund.

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