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Public debt sustainability: An empirical study on OECD countries

Elton Beqiraj, Silvia Fedeli and Francesco Forte

Journal of Macroeconomics, 2018, vol. 58, issue C, 238-248

Abstract: For a panel of 21 OECD heterogeneous countries from 1991 to 2015, we study governments’ reactions to the accumulation of debt and look at whether governments voluntary take corrective measures when the debt-GDP ratio starts rising or they rather let the debt grow. We distinguish between discretionary and automatic response of primary balance of government actions, as captured by the structural component of public primary balance and by cyclical component of public primary balance. We show the existence of a systematic long-term relationship between debt and structural primary balance supporting the view that the long-term governments’ discretionary response to increases in the debt-GDP ratio is negative, that is, governments are not currently taking long-term actions that counteract the increases in debts and do not satisfy the intertemporal budget constraint. In the short term, an asymmetric fiscal policy response exploiting the output gap, by part of the political class of the countries considered, seems to emerge: it intervenes with a new deficit and debt when the output gap is positive, but it does not adopt a symmetrical correction when the situation is reversed.

Keywords: Public debt; Sustainability; Primary surplus; Unit root; Cointegration (search for similar items in EconPapers)
JEL-codes: H6 H0 E6 (search for similar items in EconPapers)
Date: 2018
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