Determinants of Public Debt And Fiscal Sustainability

Abstract

The subject of this doctoral dissertation is an analysis of determinants of the public debt accumulation and assessment of fiscal sustainability in Serbia and selected peer countries. The main goal is empirical quantification of the relations between public debt dynamics and its determinants and subsequent assessment of fiscal sustainability conditions. The methodology of empirical research is based on three macroeconomic concepts: debt accumulation identity, intertemporal budget constraint and fiscal reaction function. The focus of empirical research is on econometric modeling of public debt dynamics with respect to fiscal and non-fiscal determinants and forward-looking simulations of the public indebtedness indicators. The central part of the empirical research methodology is divided into four building blocks. The first methodological block is an exercise of debt accumulation decomposition to individual contributions of its determinants. The second block is a panel regression analysis that quantifies the impact of debt determinants (primary balance, real growth, inflation, real exchange rate, and interest rate) on the dynamics of actual and structural public indebtedness. The third block is a panel estimation of the reaction of fiscal policy stance to the debt accumulated in the past and cyclicality of economic output. Application of scenario analysis and stress testing to forward-looking simulations of the debt dynamics as a forth block completes research methodology. The results of empirical research imply that all four hypotheses are proved. Results from the regression modeling of public indebtedness confirm the dynamics of the debt covariates with non-fiscal and fiscal variables. Descriptive analysis of debt decomposition and econometric modeling of indebtedness impose that debt-deficit adjustments and cyclically-adjusted primary balance as the fiscal variables are the most important contributors to public debt dynamics. Estimated results from the empirical modeling of the fiscal reaction function reveal that in the post-crisis period, the fiscal stance of the Emerging European Countries (EEC) positively responded to accumulated debt, confirming third hypothesis. Scenario analysis and Monte Carlo debt simulations indicate that accumulation of public debt would be profoundly accelerated if EEC countries did not interrupt practicing pro-cyclical fiscal policy behavior after the global crisis outbreak in support of fourth hypothesis validity.