Public Debt Dynamics and Sustainability: A Framework for Analysis

This paper presents a macro-fiscal model for examining the public sectorprimary surplus and the dynamics and sustainability of public debt in closedand open economies. The model simulates how changes in the primary surplusaffect public debt, highlighting key differences between these economiccontexts. Notably, open economies can finance fiscal deficits with foreigncurrency-denominated debt, introducing additional sources of instability inpublic debt dynamics. The analysis demonstrates how a permanent reduction inthe primary surplus undermines public debt sustainability, with outcomes shapedby economic conditions and the features of open and closed economies.Furthermore, it confirms that delays in implementing fiscal adjustmentsfollowing a destabilizing shock result in increasingly severe correctivemeasures over time.

JEL Classification: E62, H62, H63

Keywords: Debt, Dynamic, Sustainability, Fiscal Adjustment

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