Debt by rules: Recrafting impact of infrastructure investments and business cycles on debt sustainability

Abstract

For decades, economists have advocated for growth initiatives, including the debt-growth hypothesis, which suggests that leveraging debt for infrastructure investments can spur growth. However, past generations often supported deficit spending to finance wars, social programs, and economic stimuli without fully considering the long-term consequences. While not entirely to blame, their policy choices, consumption habits, and resistance to necessary reforms have significantly contributed to the current debt crisis. This has resulted in future generations facing higher taxes, reduced public investment, economic instability, and inequity. This paper offers three critical contributions. First, it explores how infrastructure investments and business cycles influence debt sustainability within the context of fiscal rules. Second, it develops and estimates a robust macroeconomic model to evaluate the fundamental drivers of debt sustainability using advanced dynamic analysis. Third, it investigates asymmetric effects through Quantile-Quantile regression. The findings reveal that the relationship between infrastructure investment, business cycles, and debt sustainability varies across continents. Moreover, past debt sustainability emerges as a powerful and statistically significant predictor of current debt stability.