Cover IMF Working Papers
Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks
Author: Fuad Hasanov and Reda Cherif
Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 230
Language:
English
Publication Date:
01 Sep 2012
DOI:
https://doi.org/10.5089/9781475510553.001
ISBN:
9781475510553
ISSN:
1018-5941
Pages:
28
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (4.4 MB) Download Epub
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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund