Private and public debt interlinkages in bad times

Drawing on a large sample of recession episodes, we document that those preceded by larger buildups in private debt tend to be followed by larger accumulations of public debt. Similarly to recessions preceded by a rapid run-up in public debt, these ex-post public debt buildups are associated with a more muted growth in government expenditures and a sharper rise in fiscal stress. The documented pattern becomes particularly intense in financial crises and emerges in both low and high public debt environments. These empirical regularities suggest that private sector indebtedness should be considered a relevant factor in the assessment of the soundness of the fiscal position.