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A New Decomposition of Public Debt Dynamics in the Euro Area

Author

Listed:
  • Jef Boeckx

    (National Bank of Belgium, Economics and Research Department)

  • Leonardo Iania

    (UCLouvain, CORE, KULeuven)

  • Joris Wauters

    (National Bank of Belgium, Economics and Research Department)

Abstract

We develop a decomposition of debt-to-GDP dynamics that distinguishes infla tion compensation, real interest rates, and compensation for bearing interest-rate and sovereign risk. Using security-level data from the Eurosystem’s Securities Hold ings Statistics, we apply it to the five largest euro-area sovereign issuers. We find that low ex ante real interest rates relative to real GDP growth substantially re duced debt ratios, whereas short-term inflation surprises contributed only modestly. Compensation for interest-rate and sovereign risk was economically important and varied markedly across countries and over time. News about future inflation gen erated sizeable return surprises, driving a wedge between realised returns and the compensation for interest-rate risk priced ex ante. Finally, central-bank bond hold ings transferred interest-rate and sovereign-risk exposure from private investors to the consolidated public sector. This transfer initially reduced consolidated debt ratios, but subsequently raised them as policy rates and bond yields increased.

Suggested Citation

  • Jef Boeckx & Leonardo Iania & Joris Wauters, 2026. "A New Decomposition of Public Debt Dynamics in the Euro Area," Working Paper Research 497, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:202610-497
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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