When Debt Heals and When It Hurts: Policy Insights from a Global Growth-at-Risk Analysis

The relationship between public debt and economic growth has long been debated in the literature, with empirical evidence yielding negative, negligible, or even positive estimates. We argue that these contradictory findings partly reflect overlooked distributional asymmetries in the debt growth nexus. Using panel quantile regressions with fixed effects for 192 countries within a Growth-at-Risk (GaR) framework, we examine how debt shapes the conditional distribution of growth. Our results show that debt reductions are typically followed by non-Keynesian expansionary effects at the lower end of the expected growth distribution and by traditional Keynesian effects at the upper end, while having a mostly neutral impact around the center. These findings are particularly robust for emerging and low-income countries, even after controlling for structural covariates known to influence GaR. Motivated by these findings, we further analyze the implications of fiscal consolidation for subsequent growth performance. Using both statistical measures based on the cyclically adjusted primary balance (CAPB) and, for a smaller sample, a narrative action-based indicator, we document a positive role for fiscal consolidation during periods of economic vulnerability. Overall, our findings underscore the importance of fiscal prudence during episodes of weak economic activity in emerging and low-income economies and highlight the risks associated with excessive debt accumulation under adverse economic conditions.