Copyright Page
© 2024 International Monetary Fund
WP/24/50
IMF Working Paper
Fiscal Affairs Department
Debt Surges—Drivers, Consequences, and Policy Implications
Prepared by Florian Schuster, Marwa Alnasaa, Lahcen Bounader, Il Jung, Jeta Menkulasi, and Joana da Mota1
Authorized for distribution by Nikolay Gueorguiev
March 2024
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.
ABSTRACT: Many countries find themselves with elevated debt levels, increased debt vulnerabilities, and tight financing conditions, while also facing increased spending needs for development and transition to a greener economy. This paper aims to place the current debt landscape in a historical context and investigate the drivers of debt surges, to what degree they result in a crisis as well as examine post-surge debt trajectories and under what conditions debt follows a non-declining path. We find that fiscal policy and stock-flow adjustments play important roles in debt dynamics with the valuation effects arising from currency depreciation explaining more than half of stock flow adjustments in LICs. Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent and spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path.
RECOMMENDED CITATION: Florian Schuster, Marwa Alnasaa, Lahcen Bounader, Il Jung Jeta Menkulasi, and Joana da Mota. 2024. “Debt Surges—Drivers, Consequences, and Policy Implications”. IMF Working Paper 2024/50. International Monetary Fund, Washington, DC.
| JEL Classification Numbers: | H12, H62, H63, H68 |
| Keywords: | Public debt; debt surges; financial crisis; stock-flow adjustment; exchange rate depreciation; fiscal expansion |
| Author’s E-Mail Address: | malnasaa@IMF.org, lbounader@IMF.org, jmenkulasi@IMF.org |
| JEL Classification Numbers: | H12, H62, H63, H68 |
| Keywords: | Public debt; debt surges; financial crisis; stock-flow adjustment; exchange rate depreciation; fiscal expansion |
| Author’s E-Mail Address: | malnasaa@IMF.org, lbounader@IMF.org, jmenkulasi@IMF.org |
Title Page
WORKING PAPERS
Debt Surge Episodes—Conditions, Consequences, and Policy Implications
Prepared by Florian Schuster, Marwa Alnasaa, Lahcen Bounader, Jeta Menkulasi, Joana da Mota1
Contents
I. Introduction
II. Data and Stylized Facts
III. Drivers of Debt
The Role of Stock-Flow Adjustments
Valuation Driven of Stock-Flow Adjustments
Other Stock-Flow Adjustments
IV. Estimating the Role of Fiscal Policy in Debt Surges
Identification Strategy
Results
Robustness
V. Consequences of Debt Surges
Debt Surges and Financial Crises
Empirical Strategy
Results
Robustness
Debt Surges and Ex-post Debt Paths
Empirical Strategy
Results
Robustness
VI. Conclusion and Policy Implications
Annex I. Definition of Variables and Data Sources
Annex II. Augmented Decomposition
Annex III.
References
FIGURES
1. Stylized Facts
2. Standard Decomposition
3. Augmented Decomposition
4. FX Effects and Other SFAs. EMs
5. FX Effects and Other SFAs. LICs
6. Share of FX Debt
7. FX Depreciation
8. Crisis Cases: EMs
9. Non-Crisis Cases: EMs
10. Crisis Cases: LICs
11. Non-Crisis Cases: LICs
12. Crisis Cases: FX Effect and Other SFAs
13. What Explains the Non-FX-Driven Changes in Stock-Flow Adjustments for LICs in the Largest Debt Episodes?
14. Impulse Responses of Debt-to-GDP to Fiscal Shocks
15. Forecast Error Variance Decomposition of Debt-to-GDP
16. Sum of Marginal Effects of Debt Surge Attributes
17. Sum of Marginal Effects of Selected Control Variables
18. Marginal Effects of Fiscal Policy
19. Marginal Effects of FX-Component of SFA
20. Marginal Effects of Other SFA
TABLES
1. Summary Statistics
2. Debt Surges and Financial Crises
3. Debt Surges and Ex-post Debt Paths
ANNEX FIGURES
AII.1. Standard Versus Augmented Debt Decompositions
AIII.1. Impulse Responses to a Revenue Cut in AEs
AIII.2. Impulse Responses to a Primary Spending in AEs
AIII.3. Impulse Responses to a Revenue Cuts in EMs
AIII.4. Impulse Responses to a Primary Spending Hike in EMs
AIII.5. Impulse Responses to a Revenue Cut in LICs
AIII.6. Impulse Responses to a Primary Spending Hike in LICs
AIII.7. Forecast Error Variance Decomposition of Debt-to-GDP in AEs
AIII.8. Forecast Error Variance Decomposition of Debt-to-GDP in EMs
AIII.9. Forecast Error Variance Decomposition of Debt-to-GDP in LICs
AIII.10. Impulse Responses of Debt-to-GDP to Fiscal Shocks
AIII.11. Distribution of Fiscal Shocks
AIII.12. Distribution of Fiscal Shocks
AIII.13. Alternative Ordering 2
AIII.14. Alternative Ordering 3
AIII.15. Alternative Ordering 4
ANNEX TABLES
AI.1. Panel VAR
AI.2. List of Variables (Crisis Prediction)
AI.3. List of Variables (Ex-post Debt Path Prediction)
AIII.1. Debt Surges and Financial Crises
AIII.2. Debt Surges and Financial Crises
AIII.3. Debt Surges and Financial Crises
AIII.4. Debt Surges and Ex-post Debt Paths
AIII.5. Debt Surges and Ex-post Debt Paths
AIII.6. Debt Surges and Ex-post Debt Paths
The authors would like to thank Kenji Moriyama for his guidance during this project, Vitor Gaspar, Maximilien Queyranne, and Nikolay Gueorguiev for their helpful comments and engaging discussions. Miyoko Asai provided excellent research assistance.
The authors would like to thank Kenji Moriyama for his guidance during this project, Vitor Gaspar, Maximilien Queyranne, and Nikolay Gueorguiev for their helpful comments and engaging discussions. Miyoko Asai provided excellent research assistance.