Stock-flow adjustments, public debt management and interest costs

Abstract

Data on government debt and deficits are not mutually consistent because they are obtained from cash and accrual accounting, respectively. Such aggregates are reconciled through accounting items known as stock-flow adjustments. In spite of the evidence from several studies that they are dependent on macroeconomic indicators, empirical analyses of debt sustainability disregard stock-flow adjustments. We study thirty-two economies over the period 1999–2019, finding that stock-flow adjustments are a hidden component of interest costs, largely produced by governments’ debt management activities. An alternative, stock-flow consistent variable measuring interest costs is larger, more volatile and sensitive to macroeconomic indicators than standard interest costs, featuring dynamics strongly influenced by US interest rates. This broader measure of interest costs rises with debt levels in high-debt countries, while standard interest costs do not. Hence, when ignoring the non-linear responses captured by stock-flow adjustments we underestimate the acceleration in debt costs caused by higher debt.