A1565
Title: Historical debt dynamics in the US and UK: A TVP-VARX analysis from the 1800s to the 2020s
Authors: Hiroshi Morita - Institute of Science Tokyo (Japan) [presenting]
Abstract: The sources of public debt fluctuations in the United States and the United Kingdom over two centuries (1800s-2020s) are examined using a time-varying parameter VAR with exogenous variables (TVP-VARX). A novel long-run historical dataset is exploited to estimate time-varying fiscal reaction functions and conduct historical decompositions that disentangle the roles of macroeconomic shocks and discretionary fiscal policy. The identification strategy relies on sign restrictions that distinguish supply, demand, and primary balance shocks. The primary balance responds positively to the debt ratio in both countries, suggesting that fiscal policy has not been systematically irresponsible, although the magnitude of this response is modest. Historical decomposition reveals that macroeconomic shocks, rather than discretionary fiscal policy, account for the bulk of debt dynamics, particularly in recent decades. These findings highlight the period-specific nature of fiscal sustainability and suggest that debt accumulation is largely driven by good luck rather than good policy.
