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Determinants of Domestic Public Debt Crisis

This paper analyzes the determinants of domestic public debt crisis. There have been many studies that examine the causes and consequences of external debt crisis. However, little attention has been put to domestic debt crisis and the importance of it has been neglected. This is mainly due to two facts: First, the number of occurrence of the domestic debt crisis is less than that of external debt crisis, and second, the consistent database has not been constructed. Recently, many attempts have been made to construct database for domestic debts and domestic debt crises. This paper uses the database established by Panizza (2008), and tries to analyze the determinants of domestic debt crisis. We apply the panel probit model to determine the factors that cause domestic debt crisis and to find the debt thresholds of individual countries. The results of the paper show that many macro variables are important determinants of domestic debt crisis. Also, unless important macro variables are controlled, domestic debt ratio variable did not have significantly positive coefficient. This implies that the status of the macro variables determines the tolerable levels of domestic debt ratio, and that the countries have quite different levels of domestic debt ratio thresholds depending on their macroeconomic fundamentals. Thus, unless these factors are controlled, the comparison of domestic debt ratios between countries is meaningless.