The Relationship between Debt and Output

34 Pages Posted: 20 Nov 2020

See all articles by Yung Jun Kim

Yung Jun Kim

Sogang University

Jing Zhang

Federal Reserve Bank of Chicago

Date Written: September 17, 2020

Abstract

In this paper we empirically explore the relationship between debt and output in a panel of 72 countries over the period 1970–2014 using a vector autoregression (VAR). We document two puzzling empirical findings that contrast with what is predicted by a standard small open economy model by Aguiar and Gopinath (2007), where debt and output endogenously respond to total factor productivity (TFP) shocks. First, developing countries’ debt falls after a positive output shock, while the model predicts a debt expansion. Second, output declines in developed and developing countries after a debt shock, while the model predicts higher output. The relationship between debt and output depends on the sector taking on debt (households, firms, or governments) and the source of financing (domestic versus external) and differs across countries with varying degrees of economic development or different exchange rate regimes.

Keywords: public debt, household debt, firm debt, foreign debt

JEL Classification: E44, F32, F34, F41

Suggested Citation

Kim, Yung Jun and Zhang, Jing, The Relationship between Debt and Output (September 17, 2020). FRB of Chicago Working Paper No. 2020-30, Available at SSRN: https://ssrn.com/abstract=3734468

Yung Jun Kim

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Jing Zhang (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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