Fiscal Shocks and Public Debt Dynamics in the European Union. New Evidence using Forecast-Error Identification

Karsten Staehr, Olegs Tkacevs and Ann Merit Toiger
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Karsten Staehr: Tallinn University of Technology; Eesti Pank
Olegs Tkacevs: Latvijas Banka
Ann Merit Toiger: Tallinn University of Technology

No 2026/02, Working Papers from Latvijas Banka

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.

Keywords: government debt; debt dynamics; fiscal policy; austerity; euro area (search for similar items in EconPapers)
JEL-codes: E62 H63 H68 (search for similar items in EconPapers)
Date: 2026-05-18
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Persistent link: https://EconPapers.repec.org/RePEc:ltv:wpaper:202602

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