The Impact of Different Fiscal Policy Regimes on Public Debt Dynamics

Abstract

Köhler-Töglhofer and Zagler investigate the impact of compositional effects on public debt dynamics under different fiscal policy regimes. The analysis moves from the literature on the role of compositional effects for the success of fiscal consolidation episodes to a broader set of policy regimes. It also considers the role of the macroeconomic environment. On the basis of evidence drawn from a large sample of countries over the period 1960-2002, the paper finds that compositional effects do not show statistically significant differences across policy regimes. It also shows that individual revenue and primary expenditure categories have an important impact on debt dynamics. A reduction in government wage consumption exhibits the strongest dampening impact on debt dynamics. In contrast to the literature, the paper finds that an increase in government revenues leads to a persistent decline in debt ratios.