DEBT AND DEPRESSION

Abstract

We investigate the relationship between public debt ratios and per capita output using episodal data. Episodes of debt and depression occur far more frequently than expected. Growth is lower during episodes of low, moderate, and high debt ratios; while debt ratios are higher during depressions. We look at precedence of entries and exits in overlapping episodes, and the decomposition of the debt ratio during intervals just before and after overlaps. Output movements influence the debt ratio more during exit than entry. Debt movements often precede depressions. Developing countries account for these results almost exclusively. (JEL E32, E62, O47).