Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299438 
Year of Publication: 
2023
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1496
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
This paper explores the effect of inflation supply and demand shocks on government debt. It identifies the shocks using a sign-restricted Structural Vector Autoregression (SVAR) model with quarterly data. Estimations of dynamic panel regressions and local projections suggest that supply shocks lead to persistent increases in government debt, while demand shocks result in long-lasting declines. Furthermore, high debt levels increase economic vulnerability, amplifying the impacts of both supply and demand shocks by more than three times. Specifically, supply shocks increase debt through higher borrowing costs and more prolonged depreciation, whereas demand shocks erode debt through persistent reductions in primary balance, driven by increased revenues.
Subjects: 
debt
inflation
sovereign risk
SVAR
local projections
JEL: 
C33
E31
G15
H63
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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