Do Governments React to Public Debt Accumulation? A Cross-Country Analysis

Paolo Canofari, Alessandro Piergallini and Marco Tedeschi

Papers from arXiv.org

Abstract: Do governments adjust budgetary policy to rising public debt, precluding fiscal unsustainability? Using budget data for 52 industrial and emerging economies since 1990, we apply panel methods accounting for cross-sectional dependence and heterogeneous fiscal conduct. We find that a primary-balance rule with tax-smoothing motives and responsiveness to debt has robust explanatory power in describing fiscal behavior. Controlling for temporary output, temporary spending, and the current account balance, a 10-percentage-point increase in the debt-to-GDP ratio raises the long-run primary surplus-to-GDP ratio by 0.5 percentage points on average. Corrective adjustments hold across high- and low-debt countries and across industrial and emerging economies. Our results imply many governments pursue Ricardian policy designs, avoiding Ponzi-type financing.

Date: 2025-07
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