Major public debt reductions: Lessons from the past, lessons for the future

Christiane Nickel (), Philipp Rother and Lilli Zimmermann

No 1241, Working Paper Series from European Central Bank

Abstract: The financial crisis of 2008/2009 has left European economies with a sizeable public debt stock bringing back the question what factors help to reduce these fiscal imbalances. Using data for the period 1985-2009 this paper identifies factors determining major public debt reductions. On average, the total debt reduction per country amounted to almost 37 percentage points of GDP. We estimate several specifications of a logistic probability model. Our findings suggest that, first, major debt reductions are mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on reducing government expenditure, in particular, cuts in social benefits and public wages. Second, robust real GDP growth also increases the likelihood of a major debt reduction because it helps countries to "grow their way out" of indebtedness. Third, high debt servicing costs play a disciplinary role strengthened by market forces and require governments to set up credible plans to stop and reverse the increasing debt ratios. JEL Classification: C35, E62, H6

Keywords: binary choice models; fiscal policy; public debt (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg and nep-pbe
Note: 166869
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101241

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