Discounting the Deficit into Debt: The 3D Dilemma for the OECD Countries

Abstract

Using annual data and both time series and a variety of panel econometric techniques for 22 OECD countries from the period of 1980-2016 we find that the euro countries as a group, and many of them as individual countries, too, are mainly dependent on their real economic performance regarding their possibilities to find a sustainable path for their public debt ratio. In our data the intertemporal government budget constraint (IGBC) does not seem to hold as a long-term equilibrium relationship, neither in the euro area nor in other OECD countries. However, as a shorter-term concept the a priori assumed relationship between the deficit ratio and the debt ratio might seem to hold especially for the part of OECD data, but there the real economic factors do not have almost any role in determining the debt ratio path. The differences in the dynamic relationships between the IGBC variables are very strong when comparing these two highly relevant economic areas of the global economy.