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Public debt dynamics: the effects of austerity, inflation, and growth shocks

Reda Cherif and Fuad Hasanov

Empirical Economics, 2018, vol. 54, issue 3, No 8, 1087-1105

Abstract: Abstract We study the impact of macroeconomic shocks on US public debt dynamics using a VAR with debt feedback. Following a primary balance, or austerity, shock, the debt ratio initially declines but at a cost of lower growth. The debt ratio then rises to its pre-shock path, suggesting the austerity shock could be self-defeating. An inflation shock reduces the debt ratio initially, while a positive growth shock unambiguously lowers debt. Our specification, properly incorporating the debt equation, produces different debt impulse responses and forecasts from VAR models either excluding debt or including debt linearly.

Keywords: Public debt; Fiscal policy; VAR; Impulse responses (search for similar items in EconPapers)
JEL-codes: H60 E31 E62 C32 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Public Debt Dynamics; The Effects of Austerity, Inflation, and Growth Shocks (2012) Downloads
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DOI: 10.1007/s00181-017-1260-3

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