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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
Article
  • 225 Downloads

Abstract

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.

Keywords

Public debt Fiscal policy VAR Impulse responses 

JEL Classification

H60 E31 E62 C32 

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Copyright information

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

Authors and Affiliations

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

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