Economic Growth after Debt Surges

Joao Jalles and Paulo Medas

No 2022/0244, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: Debt levels, both private and public, were already at record highs before the Covid-19 pandemic, and surged further in 2020. The high indebteness raises concerns whether it will undermine future growth prospects. This paper contributes to the ongoing debate by examining what happens to economic growth after debt surges. We apply a local projection method to a new dataset of debt surges in 190 countries between 1970 and 2020. How results show that the relationship between debt surges and economic growth are complex. Debt surges tend to be followed by weaker economic growth and persistently lower output. However, this negative relationship does not always hold. Surges in public debt tend to have the most negative impact on future growth prospects. This is particularly the case if the economy is already operating with a large positive output gap. Debt surges also tend to be followed by weaker economic growth if the initial debt levels are high, especially for private debt surges. Our results also show how debt surges impact future growth. Public debt surges are associated with especially weaker private and public investment, although both private and public consumption are also negatively affected. Surges in corporate debt are followed by lower private and public investment.

Keywords: Public debt; private debt; economic growth; potential GDP; investment; panel data; local projection; nonlinearities (search for similar items in EconPapers)
JEL-codes: C33 E20 F44 H63 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Economic Growth After Debt Surges (2022)
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