Stock-Flow Adjustments, Public Debt Management and Interest Costs

Abstract

We find evidence of a non-linear relationship between stock-flow adjustmentsand debt levels that is different for low- and high-debt economies. Stockflowadjustments are largely a by-product of efficient public debt management.We study an alternative measure of interest costs on debt — dubbedshadow interest costs — that accounts for the effects of stock-flow adjustments,allowing stock-flow consistent analyses of debt dynamics. Shadow interest costsare larger, more volatile, and sensitive to changes in macroeconomic conditionsthan standard interest costs. The dynamics of shadow interest costs is largelyshaped by common global factors that mirror U.S. interesse rates.

Keywords: E62, H53, H63, I38