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

Fuad Hasanov and Reda Cherif

No 2012/230, 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: WP; austerity shock; debt dynamics; debt ratio decline; inflation shock; debt reduction; Public debt; fiscal policy; VAR; impulse responses; debt impulse responses; baseline debt ratio; debt feedback; Inflation; Debt sustainability analysis; Vector autoregression; Fiscal stance; Global (search for similar items in EconPapers)
Pages: 28
Date: 2012-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=26268 (application/pdf)

Related works:
Journal Article: Public debt dynamics: the effects of austerity, inflation, and growth shocks (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2012/230

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().