Empir Econ (2018) 54:425–460
How do ﬁnancial cycles affect public debt cycles?
Received: 3 November 2015 / Accepted: 14 November 2016 / Published online: 3 January 2017
© Springer-Verlag Berlin Heidelberg 2017
Abstract We employ the duration framework 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 associ-
ation 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 (per-
sistence of adjustment effort hypothesis) and reduces the spell of expansions (debt
sustainability hypothesis). The results are robust to the inclusion of global factors,
openness, political stability, and debt crisis indicators as additional controls.
Keywords Public debt cycles · Credit cycles · Asset price cycles · Duration analysis
JEL Classiﬁcation E6 · C4 · H6
I would like to thank Bernardin Akitoby, Tamim Bayoumi, Julio Escolano, Karina Garcia, Vitor Gaspar,
Deniz Igan, Luis Jacome, Carlos Mulas-Granados, Martin Saldias, Damiano Sandri, Abdelhak Senhadji,
Cesar Serra, Marzie Taheri Sanjani, and seminar participants at IMF’s Fiscal Affairs Department for
useful comments and suggestions. Macarena Torres Girao provided excellent editorial assistance. The
views expressed in this paper are those of the author and do not necessarily represent those of the IMF or
International Monetary Fund, Washington, DC, USA