How Do Public Debt Cycles Interact with Financial Cycles?

November 25, 2015

Preview Citation

Format: Chicago

Tigran Poghosyan. How Do Public Debt Cycles Interact with Financial Cycles?, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We employ a duration model to study determinants of public debt cycles in 57 advanced and emerging economies over the 1960–2014 period, with a particular focus on the impact of financial cycles. The results suggest that the association between financial and debt cycles is asymmetric. Debt expansions preceded by overheating in credit and financial markets tend to last longer than other expansions, but there is no significant association between financial cycles and debt contractions. There is strong evidence of duration dependence in both phases of the cycle, with the likelihood of expansions and contractions to end increasing with the length of their respective spells. Higher initial level of debt increases the spell of contractions (persistence of adjustment effort hypothesis) and reduces the spell of expansions (debt sustainability hypothesis). This result is robust to the inclusion of global factors, openness, political stability, and debt crisis indicators as additional controls.

Subject: Financial cycles, Financial sector policy and analysis, Fiscal policy, Fiscal stance, Housing prices, Inflation, Prices, Public debt

Keywords: Asset price cycles, Contraction episode, Contraction specification, Credit cycles, Debt contraction, Debt expansion, Duration analysis, Equity price, Financial cycles, Fiscal stance, Global, Housing prices, Inflation, Public debt cycles, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/248
Stock No:

WPIEA2015248
ISBN:

9781513511641
ISSN:

1018-5941

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