Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-10T12:36:12.645Z Has data issue: false hasContentIssue false
  • English
  • Français

THE JANUS-FACED NATURE OF DEBT: RESULTS FROM A DATA-DRIVEN COINTEGRATED SVAR APPROACH

Published online by Cambridge University Press:  01 August 2018

Mattia Guerini ,
Alessio Moneta ,
Mauro Napoletano  and
Andrea Roventini
Mattia Guerini*
Affiliation:
OFCE - SciencesPo and Scuola Superiore Sant’Anna
Alessio Moneta
Affiliation:
Scuola Superiore Sant’Anna
Mauro Napoletano
Affiliation:
OFCE - SciencesPo, SKEMA Business School and Universitè Côte d’Azur and Scuola Superiore Sant’Anna
Andrea Roventini
Affiliation:
Scuola Superiore Sant’Anna and OFCE - SciencesPo
*
Address correspondence to: Mattia Guerini, 60, rue Dostoievski 06902 Sophia-Antipolis Cedex, France; e-mail: mattia.guerini@sciencespo.fr
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we investigate the causal effects of public and private debts on US output dynamics. We estimate a battery of Cointegrated Structural Vector Autoregressive models, and we identify structural shocks by employing Independent Component Analysis, a data-driven technique which avoids ad-hoc identification choices. The econometric results suggest that the impact of debt on economic activity is Janus-faced. Public debt shocks have positive and persistent influence on economic activity. In contrast, rising private debt has a milder positive impact on gross domestic product, but it fades out over time. The analysis of the possible transmission mechanisms reveals that public debt crowds in private consumption and investment. In contrast, mortgage debt fuels consumption and output in the short-run, but shrinks them in the medium-run.

Keywords

Public and Private DebtBusiness Cycle FluctuationsIndependent Component AnalysisSVAR Identification
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Special Issue 1: Macroeconomic Modeling and Empirical Evidence in the Wake of the Crisis , January 2020 , pp. 24 - 54
Copyright
© Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are indebted to Kevin D. Hoover, Herbert Dawid, Davide Fiaschi, and Fulvio Corsi for useful comments and suggestions on preliminary versions of the paper. Thanks also to the participants at the conferences WEHIA 2016 (Castellon de la Plana) and CRISIS 2016 (Ancona). MG, MN, and AR acknowledge financial support of the European Union Horizon 2020 research and innovation programme under grant agreements no. 649186 (ISIGrowth) as well as the financial support of the Horizon 2020 Framework Program of the European Union under the grant agreement no. 640772 – Project DOLFINS (Distributed Global Financial Systems for Society). AM acknowledges financial support from the Institute for New Economic Thinking under grant agreement INO15-00021.

References

Ahelegbey, Daniel Felix, Billio, Monica, and Casarin, Roberto (2016) Bayesian graphical models for structural vector autoregressive processes. Journal of Applied Econometrics 31 (2), 357–386.CrossRefGoogle Scholar
Barro, Robert J. (1974) Are government bonds net wealth? Journal of Political Economy 82 (6), 1095–1117.CrossRefGoogle Scholar
Barro, Robert J. (1989) The Ricardian approach to budget deficits. Journal of Economic Perspectives 3 (2), 37–54.CrossRefGoogle Scholar
Batini, Nicoletta, Melina, Giovanni, and Villa, Stefania (2016) Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly. IMF working paper no. 16/104.Google Scholar
Bernanke, Ben S., Gertler, Mark, and Gilchrist, Simon (1999) The financial accelerator in a quantitative business cycle framework. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics. Elsevier.Google Scholar
Bessler, A. David and Lee, Seongpyo (2002) Money and prices: U.S. Data 1869–1914 (A study with directed graphs). Empirical Economics 27 (3), 427–446.CrossRefGoogle Scholar
Brunnermeier, M. K., Eisenbach, T. M., and Sannikov, Y. (2013) Macroeconomics with Financial Frictions: A Survey. In Acemoglu, Daron, Arellano, Manuel, and Dekel, Eddie (eds.), Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society, Vol. II: Applied Economics. New York: Cambridge University Press, pp. 4–94.Google Scholar
Stephen, Cecchetti, Mohanty, Madhusudan, and Zampolli, Fabrizio (2011) The Real Effects of Debt. BIS working papers 352.Google Scholar
Checherita-Westphal, Cristina and Rother, Philipp (2010) The impact of high government debt on economic growth and its channel: An empirical investigation for the Euro Area. European Economic Review 56 (7), 1392–1405.CrossRefGoogle Scholar
Delli Gatti, D., Gallegati, M., Greenwald, B., Russo, A., and Stiglitz, J. (2010) The financial accelerator in an evolving credit network. Journal of Economic Dynamics and Control 34, 1627–1650.CrossRefGoogle Scholar
Demiralp, Selva and Hoover, Kevin D. (2003) Searching for the causal structure of a vector autoregression. Oxford Bulletin of Economics and Statistics 65, 745–767.CrossRefGoogle Scholar
Dosi, Giovanni, Fagiolo, Giorgio, Napoletano, Mauro, and Roventini, Andrea (2013) Income distribution, credit and fiscal policies in an agent-based Keynesian model. Journal of Economic Dynamics and Control 37 (8), 1598–1625.CrossRefGoogle Scholar
Dosi, Giovanni, Fagiolo, Giorgio, Napoletano, Mauro, Roventini, Andrea, and Treibich, Tania (2015) Fiscal and monetary policies in complex evolving economies. Journal of Economic Dynamics and Control 52, 166–189.CrossRefGoogle Scholar
Eberhardt, Markus and Presbitero, Andrea F. (2015) Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics 97 (1), 45–58.CrossRefGoogle Scholar
Egert, Balazs (2015) Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics 43, 226–238.CrossRefGoogle Scholar
Eggertsson, Gauti B. and Krugman, Paul (2012) Debt, deleveraging, and the liquidity trap: A Fisher-Minsky-Koo approach. Quarterly Journal of Economics 127 (3), 1469–1513.CrossRefGoogle Scholar
Ferraresi, Tommaso, Roventini, Andrea, and Fagiolo, Giorgio (2015) Fiscal policies and credit regimes: A TVAR approach. Journal of Applied Econometrics 30 (7), 1047–1072.CrossRefGoogle Scholar
Fisher, Irving (1933) The debt-deflation theory of great depressions. Econometrica 1 (4), 337–357.CrossRefGoogle Scholar
Furlong, Fred and Takhtamanova, Yelena (2012) Did the Housing Boom Affect Mortgage Choices? Federal Reserve Bank of San Francisco Economic Letter, 2012–2033.Google Scholar
Gertler, Mark and Kiyotaki, Nobuhiro (2010) Financial intermediation and credit policy in business cycle analysis. Handbook of Monetary Economics 3 (3), 547–599.CrossRefGoogle Scholar
Gourieroux, Christian, Monfort, Alain, and Renne, Jean Paul (2017) Statistical inference for independent component analysis: Application to structural VAR models. Journal of Econometrics 196 (1), 111–126.CrossRefGoogle Scholar
Greenwald, Bruce C. and Stiglitz, Joseph E. (1993) Financial market imperfections and business cycles. Quarterly Journal of Economics 108 (1), 77–114.CrossRefGoogle Scholar
Herndon, Thomas, Ash, Michael, and Pollin, Robert (2013) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Cambridge Journal of Economics 38 (2), 257–279.CrossRefGoogle Scholar
Holmstrom, Bengt and Tirole, Jean (1998) Private and public supply of liquidity. Journal of Political Economy 106, 1–40.CrossRefGoogle Scholar
Hyvarinen, Aapo, Karhunen, Juha, and Oja, Erkki (2005) Indepentent Component Analysis. John Wiley & Sons.Google Scholar
Hyvarinen, Aapo, Zhang, Kun, Shimizu, Shohei, and Hoyer, Patrick O. (2010) Estimation of a structural vector autoregression model using non-gaussianity. Journal of Machine Learning Research 11, 1709–1731.Google Scholar
Johansen, Søren (1995) Likelihood-Based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press.CrossRefGoogle Scholar
Johansen, Soren and Juselius, Katarina (1990) Maximum likelihood estimation and inference on cointegration – with applications to the demand for money. Oxford Bulletin of Economics and Statistics 52 (2), 169–210.CrossRefGoogle Scholar
Johansen, Søren and Juselius, Katarina (1994) Identification of the long-run and the short-run structure an application to the ISLM model. Journal of Econometrics 63 (1), 7–36.CrossRefGoogle Scholar
Jorda, Oscar, Schularick, Moritz, and Taylor, Alan M. (2013) When credit bites back. Journal of Money, Credit and Banking 45 (s2), 3–28.CrossRefGoogle Scholar
Jorda, Oscar, Schularick, Moritz, and Taylor, Alan M. (2014) Private credit and public debt in financial crises. FRBSF Economic Letters, Federal Reserve Bank of San Francisco.Google Scholar
Jorda, Oscar, Schularick, Moritz and Taylor, Alan M. (2016) The great mortgaging: housing finance, crises and business cycles. Economic Policy 31 (85), 107–152.CrossRefGoogle Scholar
Koo, R. (2008) The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession. Singapore: John Wiley & Sons (Asia) Pte. Ltd.Google Scholar
Lütkepohl, Helmut (1991) Introduction to Multiple Time Series Analysis. Springer.CrossRefGoogle Scholar
Mian, Atif and Sufi, Amir (2009) The consequences of mortgage credit expansion: Evidence from the U.S. mortgage default crisis. Quarterly Journal of Economics 124 (4), 1449–1496.CrossRefGoogle Scholar
Mian, Atif and Sufi, Amir (2011) House prices, home equity-based borrowing, and the US household leverage crisis. American Economic Review 101 (5), 2132–2156.CrossRefGoogle Scholar
Mian, Atif, Sufi, Amir, and Verner, Emil (2017) Household debt and business cycles worldwide. The Quarterly Journal of Economics 132 (4), 1755–1817.CrossRefGoogle Scholar
Minea, Alexandru and Parent, Antoine (2012) Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and Some Complex Nonlinearities. Working papers 201218, CERDI.Google Scholar
Minsky, Hyman P. (1986) Stabilizing an Unstable Economy. New Haven and London: Princeton University Press.Google Scholar
Moneta, Alessio (2008) Graphical causal models and VARs: An empirical assessment of the real business cycles hypothesis. Empirical Economics 35 (2), 275–300.CrossRefGoogle Scholar
Moneta, Alessio, Entner, Doris, Hoyer, Patrik O., and Coad, Alex (2013) Causal inference by independent component analysis: Theory and applications. Oxford Bulletin of Economics and Statistics 75 (5), 705–730.CrossRefGoogle Scholar
Ng, Serena and Wright, Jonathan H. (2013) Facts and challenges from the great recession for forecasting and macroeconomic modeling. Journal of Economic Literature 51 (4), 1120–54.CrossRefGoogle Scholar
Panizza, Ugo and Presbitero, Andrea (2013) Public debt and economic growth in advanced economies: A survey. Swiss Journal of Economics and Statistics 149 (2), 175–204.CrossRefGoogle Scholar
Panizza, Ugo and Presbitero, Andrea F. (2014) Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics 41, 21–41.CrossRefGoogle Scholar
Phillips, Peter C. B. and Perron, Pierre (1988) Testing for a unit root in time series regression. Biometrika 75 (2), 335.CrossRefGoogle Scholar
Proaño, Christian R., Schoder, Christian, and Semmler, Willi (2014) Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions. Journal of International Money and Finance 45, 17–37.CrossRefGoogle Scholar
Reinhart, Carmen M., Reinhart, Vincent R., and Rogoff, Kenneth S. (2012) Public debt overhangs: Advanced-economy episodes since 1800. Journal of Economic Perspectives 26 (3), 69–86.CrossRefGoogle Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2009) This Time is Different: Eight Centuries of Financial Folly. Princeton University Press.Google Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2010) Growth in a time of debt. American Economic Review 100 (2), 573–78.CrossRefGoogle Scholar
Schularick, Moritz and Taylor, Alan M. (2012) Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review 102 (2), 1029–1061.CrossRefGoogle Scholar
Shimizu, Shohei, Hoyer, Patrik O., Hyvarinen, Aapo, and Kerminen, Antti J. (2006) A linear non-Gaussian acyclic model for causal discovery. Journal of Machine Learning Research 7, 2003–2030.Google Scholar
Silvapulle, Param Sothy and Podivinsky, Jan M. (2000) The effect of non-normal disturbances and conditional heteroskedasticity on multiple cointegration tests. Journal of Statistical Computation and Simulation, 65 (1–4), 173–189.CrossRefGoogle Scholar
Stiglitz, Joseph E. (2012) Stimulating the economy in an era of debt and deficit. Economists’ Voice 9 (2), 1–5.CrossRefGoogle Scholar
Stock, J. and Watson, M. (1999) Business cycle fluctuations in U.S. macroeconomic time series. In Handbook of Macroeconomics, pp. 3–64. Amsterdam: Elsevier.CrossRefGoogle Scholar
Swanson, Norman R. and Granger, Clive W. J. (1997) Impulse response functions based on a causal approach to residual orthogonalization in vector autoregressions. Journal of the American Statistical Association 92 (437), 357–367.CrossRefGoogle Scholar
Turner, Adair (2017) Between Debt and the Devil: Money, Credit, and Fixing Global Finance. Princeton University Press.Google Scholar
Woodford, Michael (1990) Public debt as private liquidity. American Economic Review 80, 382–388.Google Scholar