Working Paper: CEPR ID: DP18548
Authors: Sakai Ando; Prachi Mishra; Nikhil Patel; Adrian Peralta-Alva; Andrea Presbitero
Abstract: High public debt is urging policy makers to consider strategies to rebuild buffers and preserve debt sustainability. Using a large sample of advanced and emerging countries, we focus on fiscal consolidation, and evaluate whether—and under which conditions—fiscal consolidation is likely to be associated with a durable reduction in public debt to GDP ratios. Our findings indicate that, on average, fiscal consolidation has a minimal impact on debt ratios. However, consolidations implemented during economic upturns and in environments with high potential for crowding out effects are more likely to be associated with sustained reductions in debt ratios.
Keywords: Public Debt; Fiscal Consolidation; Structural VAR; Fiscal Policy
JEL Codes: E62; H63; H68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal consolidation (E62) | Debt ratios (G32) |
| Successful consolidations during economic expansions (E32) | Debt ratios (G32) |
| Higher inflation (E31) | Nominal GDP increase (E20) |
| Lower negative impacts on GDP growth (F69) | Debt ratios (G32) |
| Initial public debt levels high and private credit levels low (F34) | Probability of achieving lower debt ratios (G32) |
| Consolidations with greater emphasis on expenditure reductions (H69) | Debt ratios (G32) |
| Successful consolidations (G34) | Debt ratios (G32) |
| Crowding out effects (E62) | Debt ratios (G32) |