CFCM 11/08: Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in Ten EU Countries

Abstract

This paper characterises the time series properties of debt:GDP ratios in ten EU countries over the period 1982-2009. It establishes that shocks to debt ratios persist and measures the size and source of the permanent effects of shocks as they evolve over time. The analysis shows that debt dynamics in the EU10 are complicated, involving important inter-country interactions and protracted adjustment periods of the order of ten years. We find evidence of asymmetries in the effects of different forms of ‘fiscal consolidation’, with unanticipated reductions in government spending having a more permanent effect than unanticipated increases in government revenue. Unanticipated business cycle fluctuations also have important long-term effects on the ratio.

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Published in Journal of Money, Credit and Banking 2013; 45(2-3):277-298

Authors

Massimo Antonini, Kevin Lee and Jacinta Pires

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