Dynamic analysis of the determinants of public debt in Honduras, 2014-2022

Abstract

This article examines the relationship between public debt and the main macroeconomic variables for the period 2014-2022, using vector autoregressive (VAR) models. The methodology focused on the analysis of some impulse-response functions to evaluate the dynamic impact of certain random perturbations on the system variables. The results obtained show that a positive shock on the net debt/Gross Domestic Product (GDP) ratio would have a positive and short effect on economic growth, on the real interest rate, the real exchange rate (RER) and the primary deficit/GDP ratio. Instead, prices would decrease in response to innovation in the net debt/GDP. Economic growth has a more persistent impact on the interest rate and the RER, while the effect on the debt/GDP ratio dissipates in the second period. The real interest rate would briefly affect the net debt/GDP and primary deficit/GDP ratios. On the primary deficit/GDP side, it was found that net debt/GDP and economic growth would increase in the short term, the RER would appreciate, and inflation would increase. Given a positive shock to the RER, net debt/GDP and inflation would increase. Finally, innovations in inflation would increase net debt/GDP, while economic growth and the real RER decrease.