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Debt spikes, blind spots, and financial stress
Author(s) -
Jaramillo Laura,
MulasGranados Carlos,
Jalles Joao Tovar
Publication year - 2017
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1598
Subject(s) - debt , economics , internal debt , stress test , debt levels and flows , debt to gdp ratio , transparency (behavior) , monetary economics , external debt , financial market , stock market , debt ratio , financial system , finance , paleontology , horse , political science , law , biology
Are blind spots of public debt spikes sizable? And how do they affect financial stress indicators? This paper tackles these questions empirically, using information from 179 episodes of public debt spikes between 1945 and 2014. We find that large public debt spikes are neither driven by high primary deficits nor by output declines but instead by stock‐flow adjustments. These blind spots in debt dynamics are sizable in both advanced economies and emerging markets and could amount to more than 20% of gross domestic product in the median episode. These public debt spikes increase financial stress indicators significantly, in particular when a large share of public debt is held by domestic commercial banks. Enhanced transparency and better debt forecasting tools could help address financial market tensions resulting from blind spots in debt dynamics.