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SectoralDebtand

GlobalDollarCyclesinDevelopingEconomies

BadaHan,RashadAhmed,JoshuaAizenman,andYothinJinjarak

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*WethankRomainBouis,YucheolNoh,AndrésFernándezMartin,NiamhSheridan,SeriShim,MartinSommerandKenTeohfortheirhelpfulcommentsandinsightfuldiscussions.WealsothanktheseminarparticipantsatBankofKorea.TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheADB,IMF,OCC,orUSDepartmentoftheTreasury.

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IMFWorkingPaper

Strategy,Policy,andReviewDepartment

SectoralDebtandGlobalDollarCyclesinDevelopingEconomies

PreparedbyBadaHan,†RashadAhmed,‡JoshuaAizenman,§andYothinJinjarak¶*

AuthorizedfordistributionbyMartinSommer

February2024

IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicit

commentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseofthe

author(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement,ortheinstitutionsaffiliatedwiththeauthors.

ABSTRACT:Weexploretheroleofsectoraldebtdynamicsinshapingbusinesscyclesinasampleof52EmergingMarketEconomies(EMEs)andFrontierMarketEconomies(FMEs)from2005to2021.HigherhouseholddebtlevelsandgrowthareassociatedwithsignificantlyslowerGDPgrowthinmoredevelopedEMEsbutnotinlessdevelopedEMEsandFMEs.WealsoexaminetherelationshipbetweenUSdollarcycles,sectoraldebtlevelsandgrowth,andeconomicactivity.AmongdevelopedEMEs,higherexpectedhouseholddebtgrowthmagnifiestheimpactofUSdollarfluctuationsoneconomicactivity,withsignificantbutlesspersistenteffectsonconsumptionandmorepersistenteffectsoninvestment.OurempiricalfindingshighlighttheimportantroleofhouseholddebtdynamicsinrelativelydevelopedEMEs.

JELClassificationNumbers:

F41,F44,F62,G51

Keywords:

SectoralDebt;HouseholdDebt;DollarCycle;EmergingMarkets

Author’sE-MailAddress:

bhan@,

rashad.ahmed@,

aizenman@,

yjinjarak@

IMFWORKINGPAPERSSectoralDebtandGlobalDollarCyclesinDevelopingEconomies

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WORKINGPAPERS

SectoralDebtandGlobalDollar

CyclesinDevelopingEconomies

PreparedbyBadaHan,†RashadAhmed,‡JoshuaAizenman,§andYothinJinjarak¶*

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Contents

I.Introduction

5

II.SectoralDebtCyclesandEconomicGrowth

1

1

DataandSample

1

1

EmpiricalStrategy

1

3

Results

14

III.SectoralDebtandVulnerabilitytoGlobalDollarCycle

17

DebtLevelsandtheImpactofDollarCyclesonFMEsandEMEs

17

Two-StageLeastSquareEstimation

18

LocalProjection

2

2

FurtherInvestigationoftheRoleofSectoralDebtintheTransmissionofDollar

2

5

RobustnessCheck:ForeignCurrencyExternalDebtandAlternativeGrouping

2

8

IV.ConcludingRemarks

2

9

References

3

1

AnnexA.Data

3

3

AnnexB.AdditionalTables

3

4

FIGURES

1.FurtherInvestigationoftheRoleofSectoralDebtintheTransmissionofDollarShocks

7

2.SectoralDebtCyclesandVulnerabilitytoUSDAppreciationShocks

8

3.USdollarIndexandPrivateSectoralDebtsinFMEsandEMEs

18

4.ImpulseResponseFunctionsofGDPtoExpectedDebtGrowth×DollarAppreciationShocks

2

4

5.ImpulseResponseFunctionsofDebtGrowthtoExpectedDebtGrowth×DollarShocks

2

6

6.ImpulseResponseFunctionsofConsumptionandInvestmenttoExpectedDebtGrowth×Dollar

Shocks

2

7

7.ImpulseResponseFunctionsofGDPtoExpectedDebtGrowth×DollarAppreciationShockswith

ControlofForeignCurrencyExternalDebt

2

9

TABLES

1.SummaryStatistics

1

2

2.SectoralDebtCyclesandGDPGrowth

1

5

3.SectoralDebtLevelsandGDPGrowth4

1

6

4.SectoralDebtLevelsandVulnerabilitytoDollarCycles

19

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5.SectoralDebtCyclesandVulnerabilitytoDollarCycles_2SLSEstimation

2

1

A1.1stStageEstimationsin2SLSEstimations

3

4

A2.1stStageEstimationsinLocalProjectionEstimations

3

5

A3.CumulativeResponsestoExpectedDebtGrowth×DollarShocks_HouseholdDebt_Group3

3

6

A4.CumulativeResponsestoExpectedDebtGrowth×DollarShocks_CorporateDebt_Group3

3

7

A5.CumulativeResponsestoExpectedDebtGrowth×DollarShocks_HouseholdDebt_Group2

3

8

A6.CumulativeResponsestoExpectedDebtGrowth×DollarShocks_CorporateDebt_Group2

3

9

A7.CumulativeResponsesofDebtGrowthtoExpectedDebtGrowth×DollarShocks_Corporate

Debt_Group3

40

A8.CumulativeResponsesofConsumptionGrowthtoExpectedHouseholdGrowth×Dollar

Shocks_HouseholdDebt_Group3

41

A9.CumulativeResponsesofInvestmentGrowthtoExpectedHouseholdGrowth×Dollar

Shocks_HouseholdDebt_Group3

42

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I.Introduction

Thecausaleffectsofsectoraldebtcycles—leveragingandthesubsequentdeleveragingofhouseholdsor

corporates—oneconomicgrowthandothermacroeconomicvariableshavebeenofgreatinterestinthe

literatureandtopolicymakers.Furthermore,asobservedinFigure1,manycountriesexperiencedunexpectedshiftsfromleveragingtodeleveragingoverthelastseveralyears.Whiledebtlevelsinmanyofthesecountries

reachedhistoricallyhighlevelsduringtheCovid-19pandemicduetoultra-expansionarymacropolicies,

aggressivemonetarypolicytighteningbymajorcentralbanksfollowingthepandemic,inresponsetoglobalinflationpressures,causedaturnaroundofsuchdebtcycles.Giventheuncertaintyovertheglobaleconomyandhistoricallyhighdebtlevelsofthepost-pandemicera,theextenttowhichdebtdynamicsmatterfor

businesscyclesandfinancialstabilityremainsanimportantandtimelyresearchagenda.

SincetheGlobalFinancialCrisisin2008,theliteraturereneweditsinvestigationoftheeffectsofhousehold

debtcyclesoneconomicgrowth.However,mostempiricalstudiesfocusedonAdvancedEconomies(AEs).

TheinfluentialstudyofMianetal.(2017)didconductcross-countryanalysiscoveringsomeEmergingMarketEconomies(EMEs).However,thenumberofEMEsinthesampleislimited.Thus,themacroeconomiceffectsofsectoraldebtcyclesinEMEsorFrontierMarketEconomies(FMEs)havenotbeenextensivelystudiedintheliteratureandwetrytofillthisgap.Furthermore,asinFigure1,householddebtandcorporatedebtinEMEs

andFMEshadrisenfasterthanthatinAdvancedEconomies(AEs)beforethepandemic.Since2021,

corporatedebtinEMEsfellatasimilarpaceasAEs,whilehouseholddebtgrowthinEMEshasbeensluggish.HouseholdandcorporatedebtgrowthinFMEshasnotsignificantlysloweddownsincethepandemic.These

elevateddebtlevelsmotivatethestudyoftheeffectsofsectoraldebtcyclesontherealeconomyandfinancialconditionsinEMEsandFME.

Thispaperdeployssectoral-leveldebtdatafromtheInstituteofInternationalFinance(IIF)toempirically

exploretheassociationbetweensectoraldebtcyclesandeconomicgrowthinFMEsandEMEs.DifferingfromprecedingstudiessuchasCecchettietal.(2011)andMianetal.(2017),wecontributealongtwokey

dimensions.First,weassesshowtherelationshipbetweensectoraldebtcyclesandbusinesscyclesinFMEsandEMEsevolveacrossincome-levels.Mianetal.(2017)documentedtheimportanceofhouseholddebtfor

economicgrowthrelativetodebtofothersectors,andweexaminewhethersuchdominanceofhouseholddebtcyclesholdsinFMEsandEMEsaswell.Second,weanalyzehowsectoraldebtcyclesshapeeconomic

vulnerabilitytoexternalshocks.ItiswidelybelievedthatFMEsorEMEsaremoresensitivetoglobalfactors,e.g.,USfinancialanddollarcycles.WeestimatehowthesensitivityofFMEsandEMEstosuchglobalfactorsinteractswiththeirpositionwithinsectoraldebtcycles.

Webeginbyregressingmedium-runGDPgrowthratesonsectoraldebtlevelsandgrowth.First,weclassify

the52FMEsandEMEsintothreegroupsbasedon2011GDPpercapitainUSD.Thefirstgroupofcountriescontainsthosewiththelowestincomelevelsandthethirdgroupcontainsthosewiththehighestincomelevels.Wefindthathighersectoraldebtlevelsandsectoraldebtgrowthoverthepastthreeyearsarenegatively

associatedwithlowerGDPgrowthoverthefollowingthreeyears.However,theinfluenceofsectoraldebt

differsacrossincomegroupsandsectoraldebttypes.Forthehighest-incomecountries,householddebtlevelsandgrowtharestronglycorrelatedwithslowerGDPgrowth,whileothersectoraldebttypesarenot.Incontrast,thereisnosuchdominanceofhouseholddebteffectsfortheothergroups.ForrelativelypoorFMEsand

EMEs,nonfinancialcorporatedebtappearstoexertmoreinfluenceonGDPgrowththanhouseholddebt.WhilepriorresearchsuggeststhatonlyhouseholddebtmattersinAEs(Mianetal.,2017),our

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HouseholdDebt

Figure1:SectoralDebtTrendsinthe

Non-FinancialCorporateDebt

GlobalEconomy

GovernmentDebt

200520082011201420172020

(%ofGDP)

200520082011201420172020

200520082011201420172020

Notes:1)Thefiguredepictstheevolutionofthesimpleaveragesectoraldebt-to-GDPratiosof24AdvancedEconomiesand35EmergingMarketEconomies(EMEs),and22FrontierMarketEconomies(FMEs).2)ThedatasourceisGlobalDebtDatabase.3)ThesampleAEsareAustralia,Austria,Belgium,Canada,Finland,France,Germany,Greece,HongKongSAR,Iceland,Ireland,Israel,Italy,Japan,Netherlands,NewZealand,Norway,Portugal,Singapore,Spain,Sweden,Switzerland,UnitedKingdom,UnitedStates.ThesampleEMEsareArgentina,BrazilBulgariaChileChina,Colombia,CostaRica,Croatia,Cyprus,CzechRepublic,Estonia,Honduras,Hungary,Indonesia,Jordan,

Kazakhstan,Korea,Latvia,Lithuania,Malaysia,Malta,Mexico,Nicaragua,Peru,Poland,Romania,Russia,SaudiArabia,SlovakRepublic,Slovenia,SouthAfrica,Thailand,Türkiye,Ukraine,UnitedArabEm

GDPratiosbelow20%asof2019arealsoexcluded.

findingsindicatethatsuchdominanceofhouseholddebtcyclesdoesnotgenerallyholdinFMEsandEMEs,butonlyinthehighestincomegroup.

Weinterprettheresultsasreflectingdifferentfinancialandmacroeconomicconfigurationsthatvaryalong

incomegroupsandbeardifferentimplicationsforeconomicgrowth.Thehighest-incomecountriesexhibit

patternssimilartoAEs.Asaneconomymatures,householdfinancinggrowsmorecommonandmortgagedebtbecomesagrowingshareofhouseholddebt.Thesehouseholdsalsotakeonmoreleverageandaremore

exposedtohouseprices,whichmakeshouseholdconsumptionandothereconomicdecisionsmoresensitivetofinancialconditions.Atthesametime,thedevelopmentofequitymarketsorotherfinancialinnovationsmayincentivizenonfinancialcorporatestodecreasetheirleverageorholdmoreliquidassetssuchascash.Thesestrategicadaptationscanresultincorporateinvestmentdecisionsbecominglesssensitivetofluctuationsin

financialconditions,ascorporateswithlowerleverageormorecashrelylessondebtfinancingwhendebtmarketsbecometighten.However,theseareourhypotheses,andweareopentodifferentreasonable

interpretations.

Next,weanalyzehowsectoraldebtcyclesshapeeconomicvulnerabilitytoextenalshocks.Amongvarious

externalshocks,weareinterestedinchangingglobalfinancialconditionsandwechoosetheUSdollar(USD)indexasakeyglobalfactorsincemanystudiessuchasObstfeldandZhou(2023)andJiangetal.(2020)view

theUSdollarasaparticularlyimportantexternalriskfactorforFMEsandEMEs.Wefirstexaminethe

relationshipbetweensectoraldebtlevelsandthesensitivityofeconomicgrowthtochangesinthevalueoftheUSdollar(dollarshocks,hereafter).Surprisingly,wefindthathigherdebtlevelsareassociatedwithlower

fragilitytodollarshocks.WhentheUSdollarappreciates,GDPgrowthofhigh-incomeEMEswithelevated

householddebtlevelstendstocontractlessthanthatofhigh-incomeEMEswithlowhouseholddebtlevels.

Similarly,resultsforthelowest-incomeFMEsshowthathigherhouseholddebtisassociatedwithlowerfragilitytodollarshocks.Wefindnodiscerniblerelationshipbetweendebtlevelsandvulnerabilitytodollarshocksforthemiddlegroup(Group2,orrelativelypoorEMEs).

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Figure2:SectoralDebtCyclesandVulnerabilitytoUSDAppreciationShocks

Notes:ThefiguredepictstheassociationbetweenhigherdebtgrowthandfluctuationsoftheUSdollarshocksfortheemergingmarketeconomy.EconomyAismoreexposedtodollarfluctuationsthanEconomyB,despitethehigherdebtlevel.

Tothebestofourknowledge,suchresultshavenotbeenreportedintheliterature.Moreover,theresultsareatoddswiththepredictionofstandardmacro-financemodelswheremoreleverageincreasesvulnerabilityto

negativeshocks.Onepossibleexplanationofourresultisthathigherdebtlevelsareconfoundedwithstrongercreditdemandamidgoodfundamentals.Toinvestigatethemechanismsbehindourresult,weshowthathigherdebtlevelspredictsubsequentdeleveraging(i.e.,slowerdebtgrowth).Therefore,theseeminglypuzzlingresultthathigherdebtlevelsimplylessfragilitytodollarshocksmayreflectthatslowerdebtgrowthisassociatedwithowerfragilitytodollarshocks.

Werigorouslytestthishypothesisbyfirstregressingdebtgrowthfromyearttoyeart+3onthedebtlevelandothercontrolvariablesinyeart.TheninasecondstageregressionofGDPgrowth,wereplacethedebtlevelwithourmeasureofprojecteddebtgrowth.Thepanelregressionusingprojecteddebtgrowthconfirmsour

hypothesis:projectedaccelerateddebtgrowth(leveraging)isassociatedwithhigherfragilitytodollarshocksandlowerfragilitytodollarshocksunderslowerprojecteddebtgrowth(deleveraging).

Wethenestimatelocalprojectionstostudythedynamicsandpersistenceofsuchvulnerabilitytodollarshocksanddebtcycles.Forthehigh-incomeEMEs(Group3),thecombinationofUSdollarappreciationshocksandhigherprojectedhouseholddebtgrowthpersistentlydragsdownGDPgrowthforseveralyears.Thenegativeimpactpeaks2yearsafterthedollarshock.Givenadollarappreciationshock,eachadditional1ppofprojectedhouseholddebtgrowthisassociatedwith1.5ppslowerGDPgrowthinyeart+1andtheeffectpeaksinyeart+2withacumulativeadditionalGDPslowdownof1.7ppforevery1ppofprojectedhouseholddebtgrowth.

Conversely,noclearrelationshipbetweenexpecteddebtgrowthandvulnerabilitytodollarshocksisobservedforothergroupsofEMEsandFMEs,norfornonfinancialcorporatedebt.Wealsoexaminewhetherthese

resultsusingexpecteddebtgrowthcomefromitsassociationwithothermeasuresofexternalvulnerabilitiessuchasforeigncurrencydebt,andweconfirmtheydonot.

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Theseresultssuggestimportantimplicationsaboutmacro-financialstabilityandoptimaleconomicpoliciesin

FMEsandEMEs.Ourempiricalanalysissuggeststhatitisdebtgrowthratherthandebtlevelsthatmatterin

shapingvulnerabilitytodollarshocksorexternalshocksmorebroadly.ConsidertwosimilarEMEsfacingdollarappreciationshocks,butpositionedatdifferentphasesoftheirdebtcycles,asdepictedinFigure2.Oneusually

thinksthateconomyBmightbehitharderthanAbythedollarshock.However,accordingtoourresults,

economyAmightexperiencemoresignificantvulnerabilitiesthanBaseconomyBisalreadydeleveraging.

Wealsoestimatelocalprojectionsonconsumptionandinvestmenttodecomposethechannelsthroughwhich

sectoraldebtanddollarshockstransmittoeconomicactivity.Higherprojectedhouseholddebtgrowthis

associatedwithsubstantialdeclinesinconsumptionfollowingdollarappreciationshocksandtheeffectspeak

twoyearsaftertheshock,mirroringtheresponsesobservedinGDPgrowth.Additionally,higherprojecteddebtgrowthisassociatedwithmoresignificantdeclinesininvestmentfollowingUSdollarappreciationswitheffectspeaking4to6yearsaftertheshock.Theimpactoninvestmentisdelayedrelativetotheimpacton

consumptionbutalignsmorecloselywiththedynamicsofdebtgrowth.Oneplausibleinterpretationofthese

resultsisthatwhenfacingglobaldollarappreciationshocks,householdsintendingtoraisemoredebtinitially

respondbyreducingtheirconsumptioninsteadofimmediatelyreducingdebt.However,overtime,theyadjusttheirdebtlevelsinresponsetotheshock,leadingtoslowerinvestmentbyhouseholds.However,itisimportanttonotethatwhilethisinterpretationisconsistentwithourresults,itdoesnotnecessarilyruleoutalternative

explanations.Identifyingmechanismsmorepreciselyrequiresfurtherinvestigationandmoredetaileddata.

RelatedLiterature

Thispaperiscloselyconnectedtotheliteratureonsectoraldebt,primarilythatonhouseholddebtcyclesand

globalfinancialcycles.Thesetwofieldshavemostlyevolvedseparately,whileourworkliesintheirintersection.

First,thispapercontributestotheliteraturestudyingtheimportanceofdebtcyclesforrealeconomic

fluctuations.1AftertheGlobalFinancialCrisisin2008,thereweregreateffortstounderstandtheeconomic

consequencesofdebtdeleveraging.Cecchettietal.(2011)usescross-countrypanelregressionstoshowthathighersectoraldebtlevelspredictslowergrowthinthemedium-run.Similarly,Mianetal.(2017)presented

empiricalevidencethatfasterdebtgrowthpredictsslowerGDPgrowthinthemedium-runanditishousehold-sectordebtthatmattersmostforGDPgrowth.Inasubsequentpaper,Mianetal.(2020),theauthors

documentedthateconomicboomsdrivenbyhouseholddebtareassociatedwithnondurableconsumptiongoodsandthereforeconcludedthathouseholddebtcycleshavethecausaleffectofamplifyingbusinesscycles.OthernoteworthypapersareBahadirandGumus(2016),Lombardietal.(2017)andJordàetal.

(2022).Inparticular,BahadirandGumus(2016)presentempiricalevidenceonthecausalimpactofhouseholddebtonGDPgrowthinEMEs.Ourcontributiontotheliteraturearethereforetwo-fold.First,weextendthe

analysisofMianetal.(2017)toEMEsandFMEsandreportthathouseholddebtcyclesaremoreinfluentialforGDPgrowththancorporatedebtcyclesorgovernmentdebtcycles,butonlyforrelativelyhigh-incomeEMEs.

Hence,thedominanceofhouseholddebtinMianetal.(2017)doesnotgenerallyholdinEMEsandFMEsbutdoesholdinEMEsthataresocioeconomicallyclosesttoAEs.Second,weextendtheanalysistoinvestigate

therelationshipbetweensectoraldebtcyclesandthetransmissionofdollarshocks,connectingourworktothatonglobalfinancialcycles.

11Discussionsinthisparagrapharelimitedtoempiricalpapersintheliterature.AnothergroupofpapersstudycreditcyclesusingstructuralmodelsincludeKiyotakiandMoore(1997)andGeanakoplos(2010).

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Second,thispapercontributestotheliteratureonglobalfinancialcycles.Rey(2013)andMiranda-Agrippino

andRey(2020)documentco-movementamongriskyassetpricesaroundtheworldseeminglydrivenbyUS

monetarypolicy.2Subsequentstudieshavetriedtounderstandthechannelsthroughwhichshocksfromcentereconomiesaretransmittedtoperipheraleconomiesviatheglobalfinancialcycle.BrunoandShin(2015)

emphasizedtheinterconnectednessbetweenglobalbanksandlocalbanks.Kalemli-Özcan(2019)provided

evidencethatUSmonetarypolicyshockshavelargerimpactsonEMEsthanAEs.SomepapersobservedthattheglobalfinancialcycleiscloselylinkedtotheUSdollar,andthus,globalfinancialcyclesaretosomeextentglobaldollarcycles.Jiangetal.(2020)andKekreandLenel(2021)presentedDSGEmodelswherenegative(positive)shocksfromcentereconomiesresultindepreciation(appreciation)ofthecurrencyofthecenter

economywhichresemblestheUSdollar,andtheshocksaresubsequentlypropagatedtoothereconomies.Morerecently,ObstfeldandZhou(2023)empiricallyshowedthatUSdollarappreciation(depreciation)

dampens(boosts)thegrowthofEMEsandFMEs,echoingtheneedforpolicycoordinationamongcentral

banks.Wecontributetothisliteraturebyuncoveringhowsectoraldebtcycles,especiallyhouseholddebt

cyclesinrelativelyricherEMEs,interactwiththeUSdollarcycle.Tothebestofourknowledge,thereisno

precedingstudydocumentingthemoderatingroleofsectoraldebtintheglobaltransmissionofdollarshocks.

Roadmap

Theremainderofthispaperisorganizedasfollows:Section2presentstheempiricalanalysisofthe

relationshipbetweensectoraldebtcyclesandbusinesscyclesinFMEsandEMEs.Section3extendsthe

analysistotherelationshipbetweensectoraldebtcyclesandvulnerabilitytoUSdollarshocks.Finally,Section4concludesanddiscussespolicyimplications.

2Anotherimportantfindingintheirpapersisthatexchangerateflexibilitydoesnotsignificantlyinsulateaneconomyfromexternalshocksandthus,thetraditional‘internationaltrilemma’seemstohavebeenreplacedbyadilemma.Ourworkdoesnotspeakonthisissue.

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II.SectoralDebtCyclesandEconomicGrowth

ThissectionexaminestherelationshipbetweensectoraldebtcyclesandeconomicgrowthinFMEsandEMEs.Inparticular,weexaminewhethertheeffectofhouseholddebtoneconomicgrowthdocumentedinMianetal.(2017)holdsforFMEsandEMEs.

Toseehowtherelationshipbetweensectoraldebtcyclesandeconomicgrowthvariesalongincomelevels(ourproxyforeconomicdevelopment),wedividethesampleofcountriesintothreedifferentgroupsaccordingto

incomelevelsandseparatelyexaminetheassociationofsectoraldebtwitheconomicgrowthforeachincome-levelgroup.

DataandSample

ThemostimportantdatainourempiricalanalysisissectoraldebtdatafromtheGlobalDebtMonitordatabaseprovidedbytheInstituteofInternationalFinance(IIF).IIFcollectsinformationaboutsectoraldebtfromnationalandinternationalsourcessuchastheBIScreditstatisticsdatabase.TheGlobalDebtMonitordatabase

providesdebt-to-GDPratiosoffourdifferentsectors:households,nonfinancialcorporations,financial

corporations,andgovernmentfrom2005to2021.IIFdata,suchastheircapitalflowdata,arewidelyusedin

theinternationalfinanceliterature.WecomparetheGlobalDebtMonitordatabaseagainstnationalsourcesforselectedEMEsandconfirmthattheIIFdatamatchreasonablywellwithnationaldatasources.

WealsocollectdataoneconomicfundamentalsfromtheWorldEconomicOutlook(WEO)database.3DataontradeopennessandinstitutionalqualityarefromtheWorldBank.Theinstitutionalqualityindicatoristhe

averageofthesixWorldGovernanceIndicators.4SummarystatisticsforthewholesampleandeachoftheincomegroupsarereportedinTable1.

TheGlobalDebtMonitordatabasecovers31EMEsand28FMEs.Oursampleexcludesthehighest-incomecountrieswhoseGDPpercapita(purchasingpowerparity-adjustedin2017internationaldollars)isover

40,000.Fortheremaining27EMEsand28FMEs,weexclude2FMEsandanEMEasthereisnodataon

controlvariablesforthesecountries.5Asnotedearlier,wedividetheEMEsandFMEsintothreedifferent

groupsaccordingtoincomelevel.ThegroupofthelowestincomeiscomposedofeconomieswithGDPper

capitain2010internationaldollarsbelow7,000.Thesecondgroup,themediangroup,containscountrieswithanincomebetween7,000and15,000.Thehighestincomegroupcontainscountriesw