5/2026 Karsten Staehr, Olegs Tkacevs, Ann Merit Toiger. Fiscal Shocks and Public Debt Dynamics in the European Union. New Evidence using Forecast-Error Identification
Working Papers of Eesti Pank 5/2026
This paper studies the effects of fiscal shocks on the dynamics of public debt and other fiscal and macroeconomic variables. The data are annual and cover all the members of the European Union 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 is initially modest. There are large differences in how revenue and expenditure measures affect the stock of public debt. Revenue shocks have gradual and statistically insignificant effects, while primary expenditure shocks have fast, relatively large and statistically significant effects. The effects on the public debt stock differ because the resulting fiscal reactions are different for revenue or spending shocks.
Keywords: Government debt, debt dynamics, fiscal policy, austerity, euro area
JEL Codes: H63, H68, E62
