Public Debt Dynamics and Debt Feedback

Reda, Cherif and Fuad, Hasanov (2010): Public Debt Dynamics and Debt Feedback.

Abstract

We study the dynamics of U.S. public debt in a parsimonious VAR. We find that including debt feedback ensures the stationarity of debt while standard VARs excluding debt may imply an explosive debt path. We also find that the response of debt to inflation or interest shocks is not robust and depends on the policy regime. The recent past suggests that a positive shock to inflation increases debt while the same to interest rate decreases it. Positive shocks to growth and primary surplus unambiguously reduce debt.

• Item Type: MPRA Paper
• Language: English
• Keywords: debt, fiscal policy, growth, VAR, generalized impulse responses
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

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