Analyzing the Impact of Macroeconomic Shocks on Public Debt Dynamics: An Application to the Czech Republic

Melecky, Ales and Melecky, Martin (2011): Analyzing the Impact of Macroeconomic Shocks on Public Debt Dynamics: An Application to the Czech Republic.

Abstract

The global financial crisis and its ramification into the fiscal area have demonstrated the importance of regular assessment and monitoring of fiscal vulnerabilities, including the sustainability of sovereign debt. This paper extends the analytical framework of Favero and Giavazzi (2007) to facilitate the analysis of the effects of macroeconomic shocks on public debt dynamics in an open economy. It then applies this framework using the data for the Czech Republic and derives some policy implications from such an analysis. The modeling framework nests a linear structural vector auto-regression (SVAR) model estimated with short-run identifying restrictions and a non-linear equation describing the public debt dynamics. The main variables of the system include GDP growth, inflation, the effective interest rate on government debt, government expenditures and revenues, the exchange rate and government debt. The utilized estimation method is the Bayesian approach.

• Item Type: MPRA Paper
• Language: English
• Keywords: Macroeconomic Shocks, Non-linear Public Debt Dynamics, Open Economy, Czech Republic, Structural Vector Autoregression Model, Bayesian Estimation
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt

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