Seminario di Lorenzo Forni

Sala Seminari – I° piano, Palazzo Levi Cases, Via del Santo 33 - ore 12.30

17.10.2017

Debt buildups and pro-cyclical fiscal policy in emerging economies

Seminario di Lorenzo Forni, Università di Padova

This paper uses a dataset covering a large sample of countries to analyze the empirical link running from rapid debt buildups in expansions to poor economic performance in recessions. Our analysis unveils two new results. First, we document that the negative impact of rapid debt buildups on the depth and length of recessions applies to both advanced and emerging economies alike. Second, we find that in emerging economies rapid debt buildups which lead to crises have been systematically associated with cuts in private and public spending after the onset of the crisis. In particular, while advanced economies have been on average able to run countercyclical fiscal policies during recessions characterized by private sector deleveraging, tighter financing constraints have forced emerging economies’ governments to enact pro-cyclical spending cuts, thus amplifying the recession.