Economic Growth After Debt Surges

July 29, 2022

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João Tovar Jalles, and Paulo A Medas. Economic Growth After Debt Surges, (USA: International Monetary Fund, 2022) accessed November 9, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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. Our 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.

Subject: Expenditure, National accounts, Output gap, Potential output, Private debt, Production, Public debt, Public investment spending

Keywords: A number of debt, B Real GDP, Changes in debt, Debt level, Debt surge, Debt surge episode, Economic growth, Global, Investment, Local projection, Nonlinearities, Output gap, Panel data, Potential GDP, Potential output, Private consumption, Private debt, Public debt, Public investment spending, Robustness exercise, Surge episode

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/159
Stock No:

WPIEA2022159
ISBN:

9798400217227
ISSN:

1018-5941

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