Empirical analysis reveals stock-flow adjustments significantly drive public debt dynamics in European Union nations, highlighting the need to include them in debt sustainability models.
This paper examines the role of stock–flow adjustments (SFAs) in shaping public debt dynamics and explores their implications for debt sustainability analysis (DSA). As DSA typically focuses on deficits, growth, and interest rates, SFAs are often ignored in projections of public debt. We explore empirically how SFAs have contributed to the development of public debt and analyze their time-series properties in EU member states over the last 28 years. The results show that average SFAs are not zero in several countries, contribute substantially to the development of the debt–GDP ratio over time, and represent a major source of the volatility of the debt–GDP ratio. In many cases, they also exhibit significant contemporaneous comovements with fiscal and macroeconomic shocks. These findings suggest that SFAs are an important challenge for projections of public debt and DSA. In order to improve the realism of debt projections, forecasters could take account of both expected SFAs as well as the covariance structure of SFA shocks.
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Buettner et al. (2026) studied this question.
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