Explaining Movements in Government Debt

Tatiana Kirsanova, Eric Leeper, Campbell Leith and Ding Liu

No 35222, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Standard New Keynesian models with time-consistent policy predict minimal debt responses to conventional shocks, as a debt stabilization bias dominates tax-smoothing motives. We show that two mechanisms can generate debt movements of the magnitude observed in the data: increases in policymaker myopia and declines in real interest rates, such as during flight-to-safety episodes. Other potential drivers—changes in markups, debt maturity, government transfers, or large recessions—cannot account for such fluctuations.

JEL-codes: E50 E62 (search for similar items in EconPapers)
Date: 2026-05
Note: EFG
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