DEBT DYNAMICS ACROSS DEVELOPED ECONOMIES

A COMPARATIVE DECOMPOSITION OF R-G, PRIMARY BALANCES, AND STOCK–FLOW ADJUSTMENTS IN JAPAN, THE UNITED STATES, AND EUROPE

Abstract

This paper reexamines public debt dynamics in advanced economies using an accounting-based framework explicitly conditioned on rare crisis states. Conventional sustainability narratives and debt models treat the interest–growth differential as the central determinant of debt dynamics. This paper argues that this emphasis is misleading: the episodes responsible for most long-run debt accumulation—financial crises, pandemics, and large-scale interventions—are precisely those in which fiscal actions and stock–flow adjustments dominate.

Exploiting the government debt identity, the analysis decomposes changes in debt-to-GDP ratios into snowball, primary-balance, and stock–flow components. Using annual data for eight advanced economies from 1980 to 2023, the paper applies finite-sample, nonparametric tools to identify which components organize realized debt increases in debt-defining years.

The results are stark. While the snowball term is mechanically valid, it rarely aligns with observed debt increases and never dominates their magnitude. Instead, debt surges are driven by fiscal actions and stock–flow adjustments concentrated in crisis states, implying that debt sustainability is governed by crisis management rather than snowball arithmetic.