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In this paper we empirically explore the relationship between debt and output in a panel of 72 countries over the period 1970-2014 using a vector autoregression (VAR). We document two puzzling empirical findings that contrast with what is predicted by a standard small open economy model by Aguiar and Gopinath (2007) , where debt and output endogenously respond to total factor productivity (TFP) shocks. First, developing countries' debt falls after a positive output shock, while the modeldoi:10.21033/wp-2020-30 fatcat:cvpeltz6xfgvfd5lpbyiciutkm