Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in 10 EU Countries

This paper characterizes the time-series properties of debt:GDP ratios in 10 EU countries over 19822009 and measures the size and source of the permanent effects of shocks as they evolve over time. The analysis shows debt dynamics in the EU10 are complicated, involving important intercountry interactions and protracted adjustment periods of about 10 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.