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Stock-flow adjustments and interest costs in public debt dynamics

Author

Listed:
  • Fabrizio Casalin
  • Floriana Cerniglia
  • Enzo Dia

Abstract

Standard analyses of debt sustainability are based on the conventional notion of interest costs. We propose an alternative measure — dubbed shadow interest costs — that accounts for the effects of stock-flow adjustments on the stock of debt. The two measures differ because of the relevance of active debt management: Shadow costs are far larger, more volatile, persistent, and sensitive to changes in macroeconomic conditions. As a result, while reported costs for high-debt countries are largely shielded from changes in market interest rates and debt levels, shadow costs are not. These last allow far more realistic assessments of debt sustainability than their conventional counterparts.

Suggested Citation

  • Fabrizio Casalin & Floriana Cerniglia & Enzo Dia, 2021. "Stock-flow adjustments and interest costs in public debt dynamics," CRANEC - Working Papers del Centro di Ricerche in Analisi economica e sviluppo economico internazionale crn2102, Università Cattolica del Sacro Cuore, Centro di Ricerche in Analisi economica e sviluppo economico internazionale (CRANEC).
    • Handle: RePEc:crn:wpaper:crn2102
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    File URL: https://centridiricerca.unicatt.it/cranec-WP%20%2002-21_%20(Casalin-Cerniglia-Dia).pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock-flow adjustments; public debt; primary deficit;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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