Title: Fiscal Shocks and Public Debt Dynamics in the European Union. New Evidence using Forecast-Error Identification

Autors
Karsten Staehr - Department of Economics and Finance, TalTech
Olegs Tkacevs - Bank of Latvia
Ann Merit Toiger - Bank of Estonia

Abstract:

This paper studies the effects of fiscal shocks on the dynamics of public debt. Data are annual and cover all European Union members from 2001 to 2024. The fiscal shocks are identified using orthogonalised forecast errors computed from European Commission forecasts,
and the impulse responses are generated using local projections. Primary balance shocks lower government debt measured in per cent of GDP, but the effect is gradual and initially modest. Revenue shocks have gradual and statistically insignificant effects,
while primary expenditure shocks have fast, relatively large and statistically significant effects. The two types of shock have quite similar macroeconomic effects; the effects on the public debt stock are different because the fiscal reactions are different
depending on whether revenue or spending measures are used. Analyses using various subcomponents reveal that indirect taxes have comparatively strong effects on public debt; public consumption and public investment measures have quite similar effects.

The public research seminars of the Department of Economics and Finance (DEF) at Tallinn University of Technology  usually take place on the second and fourth Wednesdays of the month both in onsite and online format, unless announced otherwise. The seminar will last one hour, presentation will last approximately 45 minutes followed by 15 minutes of discussion. The seminars are held in English. Questions about the seminar can be sent to the seminar coordinator Karsten Staehr karsten.staehr@taltech.ee