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Public Debt Dynamics; The Effects of Austerity, Inflation, and Growth Shocks

Fuad Hasanov and Reda Cherif

No 12/230, IMF Working Papers from International Monetary Fund

Abstract: We study how macroeconomic shocks affect U.S. public debt dynamics using a VAR with debt feedback. Following a fiscal austerity shock, the debt ratio initially declines and then returns to its pre-shock path. Yet, the effect is not statistically significant. In a weak economic environment, the likelihood of a self-defeating austerity shock is much higher than in normal times. An inflation shock only slightly reduces the debt ratio for a few quarters. A positive growth shock unambiguously lowers debt. In our specification, the debt ratio is stationary, whereas a VAR excluding debt may imply an explosive debt path.

Keywords: Fiscal consolidation; Economic models; External shocks; Economic growth; Fiscal policy; Inflation; Public debt; VAR, impulse responses, debt ratio, debt dynamics, primary deficit, National Budget, Deficit, and Debt: General, Multiple or Simultaneous Equation Models: Time-Series Models, (search for similar items in EconPapers)
Pages: 28
Date: 2012-09-01
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Journal Article: Public debt dynamics: the effects of austerity, inflation, and growth shocks (2018) Downloads
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