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Fiscal shocks and public debt dynamics in the European Union. New evidence using forecast-error identification

Author

Listed:
  • Karsten Staehr

  • Olegs Tkacevs
  • Ann Merit Toiger

Abstract

This paper studies the effects of fiscal shocks on the dynamics of public debt and other fiscal and macroeconomic variables. The data are annual and cover all the members of the European Union from 2001 to 2024. The fiscal shocks are identified using orthogonalised forecast errors computed from European Commission forecasts, and the impulse responses are generated using local projections. Primary balance shocks lower government debt measured in per cent of GDP, but the effect is gradual and is initially modest. There are large differences in how revenue and expenditure measures affect the stock of public debt. Revenue shocks have gradual and statistically insignificant effects, while primary expenditure shocks have fast, relatively large and statistically significant effects. The effects on the public debt stock differ because the resulting fiscal reactions are different for revenue or spending shocks.

Suggested Citation

  • Karsten Staehr & Olegs Tkacevs & Ann Merit Toiger, 2026. "Fiscal shocks and public debt dynamics in the European Union. New evidence using forecast-error identification," Bank of Estonia Working Papers wo2026-05, Bank of Estonia, revised 01 Jun 2026.
    • Handle: RePEc:eea:boewps:wp2026-05
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    File URL: http://www.bankofestonia.info/pub/en/dokumendid/publikatsioonid/seeriad/uuringud//https://haldus.eestipank.ee/sites/default/files/2026-05/wp5_2026w.pdf
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    More about this item

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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