Empirical Economics

, Volume 54, Issue 3, pp 1087–1105 | Cite as

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

  • Reda Cherif
  • Fuad Hasanov


We study the impact of macroeconomic shocks on US public debt dynamics using a VAR with debt feedback. Following a primary balance, or austerity, shock, the debt ratio initially declines but at a cost of lower growth. The debt ratio then rises to its pre-shock path, suggesting the austerity shock could be self-defeating. An inflation shock reduces the debt ratio initially, while a positive growth shock unambiguously lowers debt. Our specification, properly incorporating the debt equation, produces different debt impulse responses and forecasts from VAR models either excluding debt or including debt linearly.


Public debt Fiscal policy VAR Impulse responses 

JEL Classification

H60 E31 E62 C32 


  1. Afonso A, Sousa RM (2011a) The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis. Port Econ J 10(1):61–82CrossRefGoogle Scholar
  2. Afonso A, Sousa RM (2011b) What are the effects of fiscal policy on asset markets? Econ Model 28(4):1871–1890CrossRefGoogle Scholar
  3. Afonso A, Sousa RM (2012) The macroeconomic effects of fiscal policy. Appl Econ 44(34):4439–4454CrossRefGoogle Scholar
  4. Agnello L, Sousa RM (2011) Can fiscal stimulus boost economic recovery? Rev Econ 62(6):1045–1066Google Scholar
  5. Agnello L, Sousa RM (2013a) Fiscal policy and asset prices. Bull Econ Res 65(2):154–177CrossRefGoogle Scholar
  6. Agnello L, Sousa RM (2013b) Political, institutional and economic factors underlying deficit volatility. Rev Int Econ 21(4):719–732CrossRefGoogle Scholar
  7. Agnello L, Sousa RM (2014) The determinants of the volatility of fiscal policy discretion. Fisc Stud 35(1):91–115CrossRefGoogle Scholar
  8. Agnello L, Castro V, Sousa RM (2013a) What determines the duration of a fiscal consolidation program? J Int Money Financ 37:113–134CrossRefGoogle Scholar
  9. Agnello L, Furceri D, Sousa R (2013b) Discretionary government consumption, private domestic demand, and crisis episodes. Open Econ Rev 24(1):79–100CrossRefGoogle Scholar
  10. Agnello L, Furceri D, Sousa RM (2013c) How best to measure discretionary fiscal policy? Assessing its impact on private spending. Econ Model 34:15–24CrossRefGoogle Scholar
  11. Agnello L, Castro V, Sousa RM (2015) Is fiscal fatigue a threat to consolidation programmes? Environ Plan C Gov Policy 33(4):765–779CrossRefGoogle Scholar
  12. Aizenman J, Marion N (2011) Using inflation to erode the US public debt. J Macroecon 33(4):524–541CrossRefGoogle Scholar
  13. Auerbach AJ, Gorodnichenko Y (2012) Measuring the output responses to fiscal policy. Am Econ J Econ Policy 4(2):1–27CrossRefGoogle Scholar
  14. Baldacci E, Kumar MS (2010) Fiscal deficits, public debt, and sovereign bond yields. IMF working papers 10/184, International Monetary FundGoogle Scholar
  15. Barro RJ (1979) On the determination of the public debt. J Polit Econ 87(5):940–71CrossRefGoogle Scholar
  16. Barro RJ (1980) Federal deficit policy and the effects of public debt shocks. J Money Credit Bank 12(4):747–762CrossRefGoogle Scholar
  17. Blanchard O (2011) Blanchard on 2011’s four hard truths. VoxEU.
  18. Blanchard O, Perotti R (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Q J Econ 117(4):1329–1368CrossRefGoogle Scholar
  19. Blanchard O, Simon J (2001) The long and large decline in U.S. output volatility. Brook Pap Econ Act 32(1):135–174CrossRefGoogle Scholar
  20. Bohn H (1998) The behavior of U.S. public debt and deficits. Q J Econ 113(3):949–963CrossRefGoogle Scholar
  21. Bohn H (2005) The sustainability of fiscal policy in the United States. CESifo working paper series 1446, CESifo Group MunichGoogle Scholar
  22. Boissinot J, L’Angevin C, Monfort B (2004) Public debt sustainability: some results on the French case. Working papers of the DESE 004-10, Institut National de la Statistique et des Etudes Economiques, DESEGoogle Scholar
  23. Celasun O, Keim GN (2010) The U.S. federal debt outlook: reading the tea leaves. IMF working papers 10/62, International Monetary FundGoogle Scholar
  24. Celasun O, Debrun X, Ostry JD (2007) Primary surplus behavior and risks to fiscal sustainability in emerging market countries: a “Fan-Chart” approach. IMF Staff Pap 53(3):401–425Google Scholar
  25. Chung H, Leeper EM (2007) What has financed government debt? NBER working papers 13425, National Bureau of Economic Research, IncGoogle Scholar
  26. Corsetti G, Meier A, Muller G (2009) Fiscal stimulus with spending reversals. IMF working papers 09/106, International Monetary FundGoogle Scholar
  27. Cottarelli C (2012) Fiscal adjustment: too much of a good thing? VoxEUGoogle Scholar
  28. Delong B, Summers L (2012) Fiscal policy in a depressed economy. Brook Pap Econ Act 1:233–297Google Scholar
  29. Fatas A, Summers LH (2015) The permanent effects of fiscal consolidations. Working papers, INSEADGoogle Scholar
  30. Favero C, Giavazzi F (2007) Debt and the effects of fiscal policy. NBER working papers 12822, National Bureau of Economic Research, IncGoogle Scholar
  31. Favero C, Giavazzi F (2009) How large are the effects of tax changes? NBER working papers 15303, National Bureau of Economic Research, IncGoogle Scholar
  32. Hall GJ, Sargent TJ (2011) Interest rate risk and other determinants of post-WWII US government debt/GDP dynamics. Am Econ J Macroecon 3(3):192–214CrossRefGoogle Scholar
  33. Hasko H (2007) ‘Some unpleasant fiscal arithmetic’: the role of monetary and fiscal policy in public debt dynamics since the 1970s. Research discussion papers 28/2007, Bank of FinlandGoogle Scholar
  34. IMF (2010) Will it hurt? Macroeconomic effects of fiscal consolidation. World economic outlook, Chapter 3, October, International Monetary FundGoogle Scholar
  35. IMF (2011) Addressing fiscal challenges to reduce economic risks. Fiscal monitor, September, International Monetary FundGoogle Scholar
  36. IMF (2012) Balancing fiscal policy risks. Fiscal monitor, April, International Monetary FundGoogle Scholar
  37. Kawakami K, Romeu R (2011) Identifying fiscal policy transmission in stochastic debt forecasts. IMF working papers 11/107, International Monetary FundGoogle Scholar
  38. Kirsanova T, Wren-Lewis S (2012) Optimal fiscal feedback on debt in an economy with nominal rigidities. Econ J 122(559):238–264CrossRefGoogle Scholar
  39. Koop G, Pesaran MH, Potter SM (1996) Impulse response analysis in nonlinear multivariate models. J Econ 74(1):119–147CrossRefGoogle Scholar
  40. Krugman P (2011) The fed to the rescue? Blog, August 9, New York Times.
  41. Krugman PR (1998) It’s baaack: Japan’s slump and the return of the liquidity trap. Brook Pap Econ Act 29(2):137–206CrossRefGoogle Scholar
  42. Kumar MS, Woo J (2010) Public debt and growth. IMF working papers 10/174, International Monetary FundGoogle Scholar
  43. Mankiw G (2009) U.S. needs more inflation to speed recovery, Say Mankiw, Rogoff. May 19, Bloomberg, by Rich MillerGoogle Scholar
  44. Neely CJ, Rapach DE (2008) Real interest rate persistence: evidence and implications. Federal Reserve Bank St. Louis Rev 90(6):609–641Google Scholar
  45. Perotti R (2004) Estimating the effects of fiscal policy in OECD countries. Working papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi UniversityGoogle Scholar
  46. Perotti R (2008) In search of the transmission mechanism of fiscal policy. In: NBER macroeconomics annual 2007, vol 22, NBER chapters. National Bureau of Economic Research, Inc, pp 169–226Google Scholar
  47. Polito V, Wickens M (2007) Measuring the fiscal stance. Discussion papers 07/14, Department of Economics, University of YorkGoogle Scholar
  48. Reinhart CM, Rogoff KS (2010) Growth in a time of debt. Am Econ Rev 100(2):573–78CrossRefGoogle Scholar
  49. Reinhart CM, Sbrancia MB (2011) The liquidation of government debt. NBER working papers 16893, National Bureau of Economic Research, IncGoogle Scholar
  50. Rogoff K (2009) U.S. needs more inflation to speed recovery, Say Mankiw, Rogoff. May 19, Bloomberg, by Rich MillerGoogle Scholar
  51. Rogoff K (2011) Does the economy need a little inflation? October 7, NPR, by John Ydstie.
  52. Sims CA (2011) Stepping on a rake: the role of fiscal policy in the inflation of the 1970s. Eur Econ Rev 55(1):48–56CrossRefGoogle Scholar
  53. Stock JH, Watson MW (2002) Has the business cycle changed and why? NBER working papers 9127, National Bureau of Economic Research, IncGoogle Scholar
  54. Tanner E, Samake I (2008) Probabilistic sustainability of public debt: a vector autoregression approach for Brazil, Mexico, and Turkey. IMF Staff Pap 55(1):149–182CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany (outside the USA) 2017

Authors and Affiliations

  1. 1.International Monetary FundWashingtonUSA
  2. 2.Georgetown UniversityWashingtonUSA

Personalised recommendations