Description

This paper presents a novel approach to detail the propagation of shocks to public debt. Themodeling technique involves a structural vector auto-regression (SVAR) estimator with anendogenous debt accumulation equation. It explores how the main drivers of sovereign debtdynamics—the primary balance, the interest rate, growth and inflation—interact with each other.Such analysis is particularly useful for debt sustainability analysis. We find that some interactionsexacerbate the impact of shocks to the accumulation of debt, while others act to stabilize debtdynamics. Furthermore, the choice of monetary policy regime plays an important role in these debtdynamics – countries with constrained monetary policy are more at risk from changes in marketsentiment and must rely much more on fiscal policy to constrain debt.

More publications in this series: Working Papers

More publications by: Pablo Anaya ; Alex Pienkowski