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Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks

Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks by Fuad Hasanov
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We study how macroeconomic shocks affect U.S. public debt dynamics using a VAR with debt feedback. Following a fiscal austerity shock, the debt ratio initially declines and then returns to its pre-shock path. Yet, the effect is not statistically significant. In a weak economic environment, the likelihood of a self-defeating austerity shock is much higher than in normal times. An inflation shock only slightly reduces the debt ratio for a few quarters. A positive growth shock unambiguously lowers debt. In our specification, the debt ratio is stationary, whereas a VAR excluding debt may imply an explosive debt path.
International Monetary Fund; September 2012
28 pages; ISBN 9781475565546
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Title: Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks
Author: Fuad Hasanov; Reda Cherif