Economic Growth After Debt Surges

IMF Working Papers, July 29, 2022

Source details

Examines what happens to economic growth after debt surges.
Applies a local projection method to a new dataset of debt surges in 190 countries between 1970 and 2020.
Focuses on both private and public debt surges and their heterogeneous effects on output and expenditure components.

Debt surges tend to be followed by weaker economic growth and persistently lower output.
The negative relationship between debt surges and future growth is not uniform across surge types or initial conditions.
Surges in public debt tend to have the most negative impact on future growth prospects.
- This adverse effect is particularly strong if the economy is already operating with a large positive output gap.
Debt surges are more likely to be followed by weaker economic growth when initial debt levels are high, especially for private debt surges.
Mechanisms through which debt surges impact future growth:
- Public debt surges are associated with especially weaker private and public investment.
- Both private and public consumption are also negatively affected after public debt surges.
- Surges in corporate debt are followed by lower private and public investment.

Empirical approach: local projection method.
Dataset coverage: 190 countries between 1970 and 2020.
Topics and measures considered: changes in debt, debt level, debt surge episodes, Real GDP, output gap, potential GDP, private consumption, public investment spending, and other national accounts variables.

Public debt surges warrant particular policy attention given their stronger association with subsequent declines in investment and consumption.
Macro-financial conditions at the time of a surge (for example, the presence of a large positive output gap or high initial debt levels) matter for the outlook for growth and should inform policy responses.
Monitoring corporate debt dynamics is important because corporate debt surges can depress both private and public investment.