The macroeconomic effects of public debt booms during recessions - evidence from advanced and emerging market economies

Public debt is often widely used during economic recessions to provide additional financial support for expansionary fiscal expenditures. Based on the macroeconomic data of 54 advanced and emerging market economies, this paper reveals that public debt booms during recessions have a nonlinear impact on economic growth. Initially, the impact appears weakly positive because additional debt financing supports a more expansionary fiscal policy. However, as the debt escalation leads to fiscal imbalances, fiscal consolidation becomes an involuntary endeavour, and its impact on economic growth turns negative subsequently. Moreover, this effect is particularly severe for emerging market economies and heavily indebted economies.