Explaining Movements in Government Debt
Standard New Keynesian models with time-consistent policy predict minimal debt responses to conventional shocks, as a debt stabilization bias dominates tax-smoothing motives. We show that two mechanisms can generate debt movements of the magnitude observed in the data: increases in policymaker myopia and declines in real interest rates, such as during flight-to-safety episodes. Other potential drivers—changes in markups, debt maturity, government transfers, or large recessions—cannot account for such fluctuations.
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Copy CitationTatiana Kirsanova, Eric M. Leeper, Campbell B. Leith, and Ding Liu, "Explaining Movements in Government Debt," NBER Working Paper 35222 (2026), https://doi.org/10.3386/w35222.Download Citation
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