Public debt dynamics: the effects of austerity, inflation, and growth shocks

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.

Inflation and Public Debt Reversals in Advanced Economies

“…Quantitatively, however, their results and End et al (2015)'s results from panel regression, however, are smaller than ours. Cherif and Hasanov (2018) estimate a VAR model with the debt dynamics equation using the US data, and their estimated impact of an inflation shock on debt-to-GDP ratio is comparable to ours.…”

Unpleasant debt dynamics: Can fiscal consolidations raise debt ratios?

“…As a result, implementing fiscal consolidations in more favorable times, during periods of positive GDP growth, significantly reduces the impact of fiscal tightening measures on output. This argument is illustrated by Batini, Callegari, and Melina (2012) and Cherif and Hasanov (2012), the former using a threshold VAR structure to capture asymmetric macroeconomic developments during expansions and downturns, and the latter using a modified VAR framework with debt feedback effects, which suggests that the likelihood of a short-run increase in the debt-to-GDP ratio is much higher under weak economic conditions.…”

Approaches on the Vulnerability of Romania's Economy in Terms of Budget Deficit and Inflation in a Continuous Form

“…The issue of budgetary austerity under the conditions of public deficit is treated by the theory of macroeconomic shocks, based on the forecasting analyses for the linearization of the evolution of the budget deficit by econometric modelling (Cherif and Hasanov, 2017;Gomez-Gonzalez, 2019).…”