This work analyses - theoretically and empirically - the impact that the buildup of debt, both public and private, can have on the business cycle of a country. The study takes into account the possible interactions between public and private balance sheets, for example in the case of a highly indebted private sector receiving government support in times of financial stress.
The results show that increases in private debt are associated with deeper future recessions. The same holds true for increases in public debt, but only if its level is already high. Moreover, the benefits of government support to the private sector decrease for higher values of public debt. Therefore, the analysis demonstrates the important role played by fiscal buffers in the economy.
Published in 2019 in: Journal of Macroeconomics, v. 62
