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The economic aftermath of surges in public and private debt: Initial conditions and channels

Author

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  • Jalles, João Tovar
  • Medas, Paulo

Abstract

Debt levels, both private and public, were already at record highs before the Covid-19 pandemic and surged further in 2020. The high indebtedness raises concern that it will undermine future economic prospects. Contributing to the ongoing debate, we use the local projection method to dynamically study the behavior of economic activity and its main components after public and private debt surges. A new dataset on debt surges in 190 countries between 1970 and 2020 is used. Debt surges are followed by persistently weaker economic growth. However, this negative relationship does not always hold, as it depends on the type of debt surge: rapid increases in public debt have the most negative impact, particularly when an economy operates with a large positive output gap. Debt surges also tend to be followed by worse economic performance if the initial total debt levels are high. Public debt surges lead to weaker private and public investment. Surges in nonfinancial corporate debt are followed by lower private and public investment.

Suggested Citation

  • Jalles, João Tovar & Medas, Paulo, 2024. "The economic aftermath of surges in public and private debt: Initial conditions and channels," Economic Systems, Elsevier, vol. 48(3).
    • Handle: RePEc:eee:ecosys:v:48:y:2024:i:3:s0939362524000165
    DOI: 10.1016/j.ecosys.2024.101194
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    More about this item

    Keywords

    Economic growth; Investment; Local projection; Nonlinearity; Panel data; Potential GDP; Private debt; Public debt;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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