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Stock flow adjustments in sovereign debt dynamics: The role of fiscal frameworks

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  • Afonso, António
  • Jalles, João Tovar

Abstract

We assess, by means of system GMM, how Stock Flow Adjustments (SFA) affect the debt-to-GDP ratio in a panel of 65 countries (covering both developed and emerging and low-income countries) between 1985-2014. In addition, we inspect the role of fiscal rules in affecting SFAs. We find that SFAs positively contribute to the change in the debt-to-GDP ratio with a coefficient close to one. Fiscal rules in general did not led governments to a systematic use of SFAs to lower budget deficits; however, the existence of fiscal rules with monitor compliance contributes to lower the debt level, although the cyclical deficit partly counteracts this desirable effect. The time period matters: the fall in the debt ratio due to the presence of fiscal rules before the crisis was between 1.7 and 4.2 percent of GDP while after the Global Financial Crisis, revenue and debt-based rules did not contribute to the reduction of debt, which was reinforced with large SFAs.

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  • Afonso, António & Jalles, João Tovar, 2020. "Stock flow adjustments in sovereign debt dynamics: The role of fiscal frameworks," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 1-16.
    • Handle: RePEc:eee:reveco:v:65:y:2020:i:c:p:1-16
    DOI: 10.1016/j.iref.2019.09.007
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    3. Francesca Di Iorio & Stefano Fachin, 2022. "Fiscal reaction functions for the advanced economies revisited," Empirical Economics, Springer, vol. 62(6), pages 2865-2891, June.
    4. Václav Rybáček & Petr Musil, 2020. "Vztah mezi saldem hospodaření a dluhem vládních institucí [Relation Between Government Balance and Debt]," Politická ekonomie, Prague University of Economics and Business, vol. 2020(4), pages 462-482.
    5. Bachleitner, Alena & Prammer, Doris, 2024. "Don’t blame the government!? An assessment of debt forecast errors with a view to the EU Economic Governance Review," European Journal of Political Economy, Elsevier, vol. 82(C).
    6. Andrian, Leandro Gaston & Valencia, Oscar & Hirs, Jorge & Urrea Rios, Ivan Leonardo, 2022. "Fiscal Rules and Economic Cycles: Quality (Always) Matters," IDB Publications (Working Papers) 12639, Inter-American Development Bank.
    7. Yung‐ho Chiu & Kuei‐Ying Huang & Tai‐Yu Lin & Tzu‐Han Chang, 2022. "Government debt and fiscal execution efficiency," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(1), pages 111-128, January.

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    More about this item

    Keywords

    Government debt; Budget deficit; Structural deficit; Intertemporal government budget constraint; Fiscal rules; Panel data; System GMM; Filtering;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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