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What Really Drives Public Debt: A Holistic Approach
Author:
Pablo Anayanull

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Alex Pienkowski
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Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 137
Language:
English
Publication Date:
25 Jun 2015
DOI:
https://doi.org/10.5089/9781513591353.001
ISBN:
9781513591353
ISSN:
1018-5941
Pages:
25
Keywords:
WP; debt; debt level; accumulation equation; sovereign debt; fiscal policy; monetary policy; euro area; vector autoregression; primary balance; marginal interest rate; interest rates shock; monetary policy action; marginal interest rate shock; Fiscal stance; Debt sustainability analysis; Monetary policy frameworks
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2015: Issue 137