Public Debt Dynamics : The Effects of Austerity, Inflation, and Growth Shocks

Hasanov, Fuad

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

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Year of publication:	2012
Authors:	Hasanov, Fuad
Other Persons:	Hasanov, Fuad (contributor) ; Chérif, Réda (contributor)
Publisher:	Washington, D.C : International Monetary Fund
Subject:	Öffentliche Schulden \| Public debt \| Inflation \| Schock \| Shock \| Wirtschaftswachstum \| Economic growth \| Haushaltskonsolidierung \| Fiscal consolidation