Surges in the shadows: Stock-flow adjustments and public debt spikes

In this paper, we study the drivers of public debt surges across 172 countries from 1980-2021. We focus on the role of discrepancies between the annual change in public debt and the budget deficit, referred to as stock-flow adjustments (SFA). The analysis employs survival methods to model the effect of SFA and other macroeconomic factors on the hazard rate for debt spike events. We differentiate between debt accumulation trends and spikes to examine how SFA influences the likelihood of a spike once a country is already on an increasing debt trajectory. Our results indicate that an increase of one percentage point in the SFA to GDP ratio increases the hazard rate of a surge by 15%. This effect is greater for advanced economies (25%) relative to emerging markets (14%). Moreover, contingent on a debt trend, a higher SFA significantly increases the chance that a spike will materialize, especially in advanced countries. We address the self-selection problem associated with SFA by using an IV approach based on the notion that fiscal transparency. We conclude that accurate SFA estimates are critical for debt sustainability analyses. Overall, our analysis provides novel evidence on the mechanisms underlying public debt surges and their consequences. Our findings can guide policymakers in identifying risks from hidden debt trajectories and improving transparency. The results are robust to various sensitivity checks and alternative specifications and methodologies.