  Based on the quarterly data from 26 advanced economies (AEs) and 18 emerging
market economies (EMs) over the past two decades, this paper estimates the
short- and medium-term impacts of financial cycles on the duration and
amplitude of public debt cycles. The results indicate that public debt
expansions are larger than their contractions in duration and amplitude,
aligning with the "deficit bias hypothesis" and being more pronounced in EMs
than in AEs. The impacts of various financial cycles are different.
Specifically, credit cycles in EMs significantly impact the duration and
amplitude of public debt cycles. Notably, short- and medium-term credit booms
in EMs shorten the duration of public debt contractions and reduce the
amplitude. Fast credit growth in AEs prolongs the duration of public debt
expansions and increases the amplitude. However, credit cycles in AEs show no
significant impact. For house price cycles, the overall impact is stronger in
EMs than in AEs, differing between short- and medium-term cycles. Finally, the
impact of equity price cycles is significant in the short term, but not in the
medium term. Equity price busts are more likely to prolong the expansion of
public debt in EMs while increasing the amplitude of public debt contractions
in AEs. Uncovering the impacts of multiple financial cycles on public debt
cycles provides implications for better debt policies under different financial
conditions.
