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Public Debt Dynamics; The Effects of Austerity, Inflation, and Growth Shocks

  • Fuad Hasanov
  • Reda Cherif

We study how macroeconomic shocks affect U.S. public debt dynamics using a VAR with debt feedback. Following a fiscal austerity shock, the debt ratio initially declines and then returns to its pre-shock path. Yet, the effect is not statistically significant. In a weak economic environment, the likelihood of a self-defeating austerity shock is much higher than in normal times. An inflation shock only slightly reduces the debt ratio for a few quarters. A positive growth shock unambiguously lowers debt. In our specification, the debt ratio is stationary, whereas a VAR excluding debt may imply an explosive debt path.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/230.

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Length: 28
Date of creation: 01 Sep 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/230
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