A0470
Title: Historical debt dynamics in the U.S.: Evidence from a TVPVARX model
Authors: Hiroshi Morita - Institute of Science Tokyo (Japan) [presenting]
Abstract: The drivers of fluctuations in U.S. government debt are examined using long-run data from 1880 to 2023. It is empirically assessed whether debt dynamics can be attributed to a systematic fiscal rule, fiscal policy shocks, and other identified structural shocks within a time-varying parameter VAR framework incorporating a debt-feedback rule of a prior study. The model treats the real GDP growth rate, the real long-run interest rate, and the primary surplus-to-GDP ratio as endogenous variables, with the debt-to-GDP ratio specified as exogenous. Debt dynamics are then derived explicitly from these three variables via the government budget constraint. Empirical findings are as follows: (1) discretionary fiscal policy shocks were the main contributors to debt accumulation during the 1940s through the 1960s, whereas business cycle shocks have dominated since the Global Financial Crisis; (2) the fiscal stance measured by the elasticity of the primary surplus with respect to debt is positive throughout the sample, indicating Ricardian behavior by the U.S. government (3) although debt responses to shocks have evolved smoothly over time, the difference between the responses at the beginning and end of the sample period is statistically significant. These results shed new light on the historical drivers of U.S. debt dynamics and offer a framework for evaluating future fiscal sustainability.
