The public debt crowding-in/out effects during the business cycle

Abstract To explain why fiscal multipliers are weak in times of expansion and larger in times pf recession, this paper analyses the public debt effects on some macroeconomic and fiscal variables with relation to the business cycle. Using an SVAR on United States quarterly data over the period 1966–2019, we show that in times of expansion, public debt crowds out private investment, leading to a lower growth, while in times of recession the public debt effects on growth are positive, which may explain the smaller size of the fiscal multipliers in expansions and their larger size in recessions as revealed in the post-2008 crisis. The results also revealed that government expenditure has a positive but short-lived impact on economic growth. The policy implication is that fiscal stimulus effects are important in recessions but could take time to materialize, while such effects could be short-lived in expansions, which is something that should be considered by policy-makers in their spending decisions.