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Debt Persistence in a Deflationary Environment: A Regime-Switching Model

Article

Abstract

Debt dynamics have been a central theme of discussioins in the “Great Recession”. The aim of the present paper is to study the persistence of sovereign debt within a business cycle perspective. In order to achieve this result, a Keynesian framework is considered where aggregate demand fluctuations generate quantity adjustment within a deflationary environment. Furthermore a regime switching technique, capable of generating bounded and robust endogenous fluctuations, is introduced. The piecewise linearity of the model, along with its discontinuities, obliges to operate with a low dimensional system in order to obtain two analytical results: the robustness of bounded fluctuations, and hence of debt persistence, and the driving role of growth. These results are extended to higher dimensions by means of simulations. Also in this case, the effectiveness of policies is confirmed.

Keywords

Debt Growth Regime switching Policies Discontinuities 

JEL Classification

E32 E37 E60 C62 

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.University of BergamoBergamoItaly
  2. 2.Department of Mathemtical Sciences, Mathematical Finance and EconometricsCatholic University, MilanMilanItaly

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