High public debts: Are shocks or discretionary fiscal policy to blame?

Public debt to GDP ratios have experienced significant fluctuations over both short and long horizons. Notably, the ratio spiked globally in 2020 due to the COVID-19 pandemic, before retracting substantially by 2022. To elucidate the driving forces behind these movements, we develop a structural decomposition of debt dynamics using a Structural Vector Autoregression (SVAR) identified through narrative sign restrictions. Analyzing data from 17 advanced economies since the 1980s, we find that shocks to GDP growth and interest rates collectively account for more than half of the observed annual variation in debt to GDP ratios, while discretionary fiscal policy changes contribute less than 20%. Our analysis also reveals that the primary balance multiplier on GDP is minimal. We reconcile our findings with existing literature by demonstrating that previous discrepancies arise largely from differences in shock identification methods, but also on account of cross-country heterogeneity.