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How do financial cycles affect public debt cycles?

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  • Tigran Poghosyan

    (International Monetary Fund)

Abstract

We employ the duration framework to study determinants of public debt cycles in 57 advanced and emerging economies over the 1960–2014 period, with a particular focus on the impact of financial cycles. The results suggest that the association between financial and debt cycles is asymmetric. Debt expansions preceded by overheating in credit and financial markets tend to last longer than other expansions, but there is no significant association between financial cycles and debt contractions. There is strong evidence of duration dependence in both phases of the cycle, with the likelihood of expansions and contractions to end increasing with the length of their respective spells. Higher initial level of debt increases the spell of contractions (persistence of adjustment effort hypothesis) and reduces the spell of expansions (debt sustainability hypothesis). The results are robust to the inclusion of global factors, openness, political stability, and debt crisis indicators as additional controls.

Suggested Citation

  • Tigran Poghosyan, 2018. "How do financial cycles affect public debt cycles?," Empirical Economics, Springer, vol. 54(2), pages 425-460, March.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:2:d:10.1007_s00181-016-1215-0
    DOI: 10.1007/s00181-016-1215-0
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    Cited by:

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    5. Lawrence Ogbeifun & Olatunji Shobande, 2020. "Debt sustainability and the fiscal reaction function: evidence from MIST countries," Future Business Journal, Springer, vol. 6(1), pages 1-8, December.

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    More about this item

    Keywords

    Public debt cycles; Credit cycles; Asset price cycles; Duration analysis;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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