A New Decomposition of Public Debt Dynamics in the Euro Area

Jef Boeckx (), Leonardo Iania () and Joris Wauters ()
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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

No 497, Working Paper Research from National Bank of Belgium

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.

Keywords: Public debt dynamics; sovereign bond returns and fiscal- monetary interactions (search for similar items in EconPapers)
JEL-codes: E43 E62 G12 H63 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:202610-497

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