The dynamic relationship between global debt and output

Abstract: Given the ramifications of indebtedness for global growth, researchers and policymakers are keenly interested in the mechanisms underlying the linkages between debt and economic output. In our research, summarized in this article, we find that a debt shock adversely affects future economic output, and the impact is most pronounced in developing countries and in countries with a fixed exchange rate regime. This information and related results from the study are useful for policymakers considering appropriate levels of debt as well as an exchange rate regime that is most conducive to economic growth. Another important finding is that the way debt affects economic output depends on the sector, suggesting the importance of separating public debt from private debt when undertaking future empirical studies.

Keywords: public debt; household debt; firm debt; foreign debt; International Lending and Debt Problems; Short-Term Capital Movements;

JEL Classification: E44; F31; F32; F34;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Chicago Fed Letter

Publication Date: 2021-05-04

Issue: 457

Pages: 5

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