The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper presents a novel approach to detail the propagation of shocks to public debt. The
modeling technique involves a structural vector auto-regression (SVAR) estimator with an
endogenous debt accumulation equation. It explores how the main drivers of sovereign debt
dynamics-the primary balance, the interest rate, growth and inflation-interact with each other.
Such analysis is particularly useful for debt sustainability analysis. We find that some interactions
exacerbate the impact of shocks to the accumulation of debt, while others act to stabilize debt
dynamics. Furthermore, the choice of monetary policy regime plays an important role in these debt
dynamics - countries with constrained monetary policy are more at risk from changes in market
sentiment and must rely much more on fiscal policy to constrain debt.