{"title":"Debt erosion: Asymmetric response to demand and supply shocks","authors":"","doi":"10.1016/j.iref.2024.103588","DOIUrl":null,"url":null,"abstract":"<div><p>This paper explores the effect of inflation supply and demand shocks on government debt for a sample of 32 advanced economies and 24 emerging markets from 1970 to 2022. The shocks are identified using a sign-restricted structural vector autoregression model with quarterly data. Estimations of dynamic panel regressions and local projections suggest that supply shocks lead to persistent increases in government debt, while demand shocks result in long-lasting declines. Furthermore, high debt levels amplify the impacts of both supply and demand shocks by more than three times. Specifically, supply shocks contribute to an increase in debt through elevated borrowing costs and prolonged depreciation, whereas demand shocks erode debt through persistent improvements in the primary balance, driven by increased revenues.</p></div>","PeriodicalId":14444,"journal":{"name":"International Review of Economics & Finance","volume":null,"pages":null},"PeriodicalIF":4.8000,"publicationDate":"2024-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Economics & Finance","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S105905602400580X","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This paper explores the effect of inflation supply and demand shocks on government debt for a sample of 32 advanced economies and 24 emerging markets from 1970 to 2022. The shocks are identified using a sign-restricted structural vector autoregression model with quarterly data. Estimations of dynamic panel regressions and local projections suggest that supply shocks lead to persistent increases in government debt, while demand shocks result in long-lasting declines. Furthermore, high debt levels amplify the impacts of both supply and demand shocks by more than three times. Specifically, supply shocks contribute to an increase in debt through elevated borrowing costs and prolonged depreciation, whereas demand shocks erode debt through persistent improvements in the primary balance, driven by increased revenues.
期刊介绍:
The International Review of Economics & Finance (IREF) is a scholarly journal devoted to the publication of high quality theoretical and empirical articles in all areas of international economics, macroeconomics and financial economics. Contributions that facilitate the communications between the real and the financial sectors of the economy are of particular interest.