Boundedness and nonlinearities in public debt dynamics: A TAR assessment

This study aims to investigate the dynamics of public debts over more than four decades for two of the main developed countries: the USA and the UK. To do this, we apply nonlinearity tests and threshold models. While the first tests enable us to check for further changes in the data, threshold models are required to assess the switching-regime hypothesis and to apprehend the main changes in public debts through different regimes. Our results provide several interesting findings. First, for both countries, we noted several structural breaks associated with well-known economic downturns, oil shocks, debt crises and financial crashes. Second, public debt dynamics seem to be characterized by various threshold effects that can improve the modeling and forecasting of public debt evolution. It is important to note that public debts vary significantly according to the regime and that a regime can be induced by specific macroeconomic factors. Keeping a close eye on such factors may help economists and policymakers to better control future public debt evolutions.