Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153675
Authors: 
Nickel, Christiane
Rother, Philipp
Zimmermann, Lilli
Year of Publication: 
2010
Series/Report no.: 
ECB Working Paper 1241
Abstract: 
The financial crisis of 2008/2009 has left European economies with a sizeable public debt stock bringing back the question what factors help to reduce these fiscal imbalances. Using data for the period 1985-2009 this paper identifies factors determining major public debt reductions. On average, the total debt reduction per country amounted to almost 37 percentage points of GDP. We estimate several specifications of a logistic probability model. Our findings suggest that, first, major debt reductions are mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on reducing government expenditure, in particular, cuts in social benefits and public wages. Second, robust real GDP growth also increases the likelihood of a major debt reduction because it helps countries to "grow their way out" of indebtedness. Third, high debt servicing costs play a disciplinary role strengthened by market forces and require governments to set up credible plans to stop and reverse the increasing debt ratios.
Subjects: 
binary choice models
Fiscal Policy
public debt
JEL: 
C35
E62
H6
Document Type: 
Working Paper

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