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Another way to assess the importance of the stock-flow reconciliation is to divide both sides of the equation discussed above by GDP and use it to estimate the following statistical model:. If the unexplained part of debt growth were unimportant, the above equation should fit the data well and yield an R 2 close to one. An R 2 of zero would instead indicate that there is no relationship between the dependent and the explanatory variables.
Figure 2 describes the R 2 s obtained by estimating the equation described above for different subsamples of countries. It shows that when all countries are pooled together, the R 2 is just above 0.
Mysteries and the Unexplained in Credo: Home
So far, we looked at the change in debt divided by GDP. However, for good reasons, policy discussion and fiscal sustainability assessments tend to focus on the evolution of the debt-to-GDP ratio. The growth rate of the debt-to-GDP ratio can be divided into five components: inflation, real GDP growth, interest expenditure, primary deficit interest expenditure and primary deficit add up to the total deficit , and the unexplained part.
By applying this decomposition to a large number of countries over the period —, we find that inflation and GDP growth are the main drivers of debt reduction Figure 3. Curiously, the effect of inflation dominates that of real GDP growth in every region of the world this is partly due to financial repression; see Reinhart and Sbrancia In the advanced economies and South Asia budget deficits are the main determinants of debt accumulation.
In all other regions of the world, the unexplained part of public debt is the key determinant of debt accumulation. Figure 3.
After having documented that there are large differences between deficits and changes in debt, we can explore the determinants of these differences. In Campos et al , we use a statistical model that tries to explain the unexplained part of debt with three types of variables. We first look at the interaction between currency depreciations and the presence of foreign currency debt and find that depreciations lead to large stock-flow reconciliations in countries with high levels of foreign currency debt.
Spooky! Top 10 Unexplained Phenomena | Live Science
Finally, we consider the role of banking crises. These are important events that generate contingent liabilities and other unrecorded off—balance sheet activities that can translate into debt explosions. There are two possible reasons why the statistical model described above does such a poor job at uncovering the determinants of the unexplained part of debt.
The first has to do with the fact that measurement errors that lead to an underestimation of the deficit are more important in some countries than in others. This is consistent with the findings of Aizenman and Powell , who suggest that governments have incentives to misreport public expenditure and that this comes back to haunt them as debt is re-assessed in the future. The second is that the importance of contingent liabilities that lead to debt explosions varies across countries and that the control variables included in the statistical exercise described above do not capture all the possible sources of contingent liabilities.
The fact remains, however, that irresponsible fiscal policy is not always the culprit of debt explosions. Aizenman, Joshua and Andrew Powell , " The political economy of public savings and the role of capital mobility ", Journal of Development Economics , 57 1 Search form. Figure 1.
Figure 2. Source: Campos, Jaimovich, and Panizza and IDB After having documented that there are large differences between deficits and changes in debt, we can explore the determinants of these differences.
References Aizenman, Joshua and Andrew Powell , " The political economy of public savings and the role of capital mobility ", Journal of Development Economics , 57 1 Camila Campos. Dany Jaimovich. Ugo Panizza. Don't Miss. Tony and his wife, Lindsay, have long been interested in strange anomalies. Together, they produce The Confessionals as an open and interactive forum for like-minded individuals to share their stories and experiences.
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