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Private and public debt interlinkages in bad times

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  • Bernardini, Marco
  • Forni, Lorenzo

Abstract

Drawing on a large sample of recession episodes, we document that those preceded by larger buildups in private debt tend to be followed by larger accumulations of public debt. Similarly to recessions preceded by a rapid run-up in public debt, these ex-post public debt buildups are associated with a more muted growth in government expenditures and a sharper rise in fiscal stress. The documented pattern becomes particularly intense in financial crises and emerges in both low and high public debt environments. These empirical regularities suggest that private sector indebtedness should be considered a relevant factor in the assessment of the soundness of the fiscal position.

Suggested Citation

  • Bernardini, Marco & Forni, Lorenzo, 2020. "Private and public debt interlinkages in bad times," Journal of International Money and Finance, Elsevier, vol. 109(C).
    • Handle: RePEc:eee:jimfin:v:109:y:2020:i:c:s0261560620301959
    DOI: 10.1016/j.jimonfin.2020.102239
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    More about this item

    Keywords

    Debt; Recessions; Recoveries; Local projections;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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