Stable and Unstable Debt Dynamics

This paper will link the two important aspects of Macroeconomic theories: Debt Financing Policies and debt dynamics process development. Today's research in the field of Debt Financing is mainly focusing on the debt accumulation due to the budget deficit running. In contrast, this paper is looking at how the Bond Issuance and Monetary policies can affect the Snowball Effect (Stable/Unstable Debt Dynamics). Debt Dynamics is the process, which increases country's debt even if it is not borrowing any extra money. In the worst case the process of Unstable Debt Dynamics leads to default. The analysis is researching the question: Does the inability to use Monetary Policy to finance debt can lead to higher debt dynamics,compared to the countries, which are able to use both strategies? Dated Panel Least Squares method with fixed effects was chosen for the analysis, including data for all EU countries for the period 1996-2009. The empirical findings of the paper will show that indeed the Euro-using countries do have a higher debt dynamics level, compared to the non Euro-using ones. The paper concludes with the discussion about the interesting results of the analysis.