Observatoire Français des Conjonctures Économiques
Working paper de l'OFCE
[en] Public and Private Debt, Business Cycle Fluctuations, Independant component analysis, SVAR identification
[en] In this paper, we investigate the causal effects of public and private debts on U.S. 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 GDP, 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.