Using a large panel of OECD countries this paper studies the link between debt and macroeconomic
stability by comparing the evolution of balance sheet aggregates and economic output in high- and lowdebt
environments. While the relationship between debt and economic growth has been extensively studied
in the literature, only little attention has been paid to the impact of debt on volatility and higher moments
of output growth distributions. This paper fills in this gap. Debt-fuelled expansions are found to typically
last longer but to culminate in a more sizeable downturn. The greater amplitude of business cycles in
high-debt environments reflects higher macroeconomic volatility but also higher tail risks and adverse
asymmetries in output growth distributions. The induced welfare losses justify policy interventions aiming
at preventing excessive build-ups in debt ex-ante.
