Characterizing public debt cycles: the non-negligible impact of financial cycles

Tianbao Zhou (), Zhixin Liu () and Yingying Xu ()
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Tianbao Zhou: Beihang University
Zhixin Liu: Beihang University
Yingying Xu: Beihang University

Empirical Economics, 2025, vol. 68, issue 4, No 2, 1529-1566

Abstract: Abstract Based on the quarterly data from 26 advanced economies (AEs) and 18 emerging market economies (EMs) over the past two decades, this paper estimates the short- and medium-term impacts of financial cycles on the duration and amplitude of public debt cycles. The results indicate that public debt expansions are larger than their contractions in duration and amplitude, aligning with the "deficit bias hypothesis" and being more pronounced in EMs than in AEs. The impacts of various financial cycles are different. Specifically, credit cycles in EMs significantly impact the duration and amplitude of public debt cycles. Notably, short- and medium-term credit booms in EMs shorten the duration of public debt contractions and reduce the amplitude. Fast credit growth in AEs and low house price growth in the short term prolong the duration of public debt expansions and increase the amplitude. However, credit cycles in AEs show no significant impact. For house price cycles, the overall impact is stronger in EMs than in AEs, differing between short- and medium-term cycles. Finally, the impact of equity price cycles is significant in the short term, but not in the medium term. Equity price busts are more likely to prolong the expansion of public debt in EMs while increasing the amplitude of public debt contractions in AEs. Uncovering the impacts of multiple financial cycles on public debt cycles provides implications for better debt policies under different financial conditions.

Keywords: Public debt cycles; Financial cycles; Private sector debt; House price; Equity price (search for similar items in EconPapers)
JEL-codes: E32 E44 E60 H60 H63 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-024-02685-x

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