Public Debt Dynamics and the Impact of Fiscal Policy

Nikhil Patel and Adrian Peralta

No 2024/087, IMF Working Papers from International Monetary Fund

Abstract: Public debt-to-GDP ratios have undergone substantial fluctuations over both the short and long term. Most recently, global debt-to-GDP ratios peaked at 100% on average in 2020 due to COVID-19, retracting substantially by 2022. To understand what drives these movements, we propose a structural approach to debt decompositions based on a SVAR identified with narrative sign restrictions. We find that GDP growth shocks and the corresponding comovements of macroeconomic variables are the key drivers of debt to GDP, accounting for 40% of the observed yearly variation in 17 advanced economies since the 1980s. Discretionary fiscal policy changes, in turn, account for less than 20% of the observed changes. The analysis also finds the primary balance multiplier on GDP to be very small. We reconcile our results with the literature, underscoring the importance of accurate shock identification and accounting for cross-country heterogeneity.

Keywords: Public Debt; Fiscal Consolidation; Structural Vector Autoregression.; GDP growth shock; discretionary fiscal policy change; public debt dynamics; sign restriction; growth shock; Fiscal stance; Vector autoregression; Structural vector autoregression; Global (search for similar items in EconPapers)
Pages: 50
Date: 2024-04-26
New Economics Papers: this item is included in nep-fdg
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