Debt Reduction After Crises

14 Pages Posted: 17 Aug 2012

See all articles by Garry Tang

Garry Tang

Bank for International Settlements (BIS)

Christian Upper

Bank for International Settlements (BIS)

Date Written: September 6, 2010

Abstract

Financial crises tend to be followed by a protracted period of debt reduction in the nonfinancial private sector. We find that a period of debt reduction followed 17 out of 20 systemic banking crises that were preceded by surges in credit. Debt/GDP ratios fell by an average of 38 percentage points, returning to approximately the levels seen before the increase. If history is any guide, we should expect to see a much more significant reduction in private sector debt, particularly of households, than has so far taken place after the recent crisis. The costs of this process in forgone output are difficult to pin down, but there are reasons to believe that they need not be high provided that the banking sector problems that led to the crisis are fixed.

JEL Classification: E21, E51

Suggested Citation

Tang, Garry and Upper, Christian, Debt Reduction After Crises (September 6, 2010). BIS Quarterly Review, September 2010, Available at SSRN: https://ssrn.com/abstract=1672628

Garry Tang (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Christian Upper

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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