The impact of shocks and policies on debt-to-GDP ratio dynamics: a multisectoral approach

Abstract

The dynamics of debt-to-GDP ratio is one of the major elements scrutinized by policymakers, especially in the present context characterized by the sequence of global financial crises, the Covid-19 pandemic and, more recently, armed conflicts in Europe. Such events call for greater public support to prevent economic collapse, raising questions about the sustainability of the sovereign debt. In this paper, we investigate the impact of selected shocks and policies on the debt-to-GDP ratio dynamics by adopting a disaggregated multi-sectoral Computable General Equilibrium model calibrated on the Social Accounting Matrix for Italy. Particularly, according to several scenarios, a rise in energy prices and a drop in exports are considered jointly with budget policies, regarding the expansion of public investment and alternative monetary policies, aimed at sustaining the economies from different perspectives. The impact of these scenarios is discussed in terms of changes in the main macroeconomic variables and dynamics of the debt-to-GDP ratio.