Debt and Macroeconomic Stability

36 Pages Posted: 15 Dec 2012 Last revised: 21 Dec 2013

See all articles by Douglas Sutherland

Douglas Sutherland

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Peter Hoeller

Organization for Economic Co-Operation and Development (OECD)

Rossana Merola

International Labour Organization (ILO)

Volker Ziemann

EDHEC Business School

Date Written: December 1, 2012

Abstract

Debt levels have surged since the mid-1990s and have reached historic highs across the OECD. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks. Furthermore, high debt levels hinder the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks. The empirical evidence suggests that when private sector debt levels, particularly for households, rise above trend the likelihood of recession increases. Measures of financial leverage give less warning and typically only deteriorate once the economy begins to slow and asset prices are falling. Government debt typically rises after the onset of a recession, suggesting that there is a migration of debt across balance sheets. Some policies, such as robust micro prudential regulation and frameworks to deal with debt overhangs and maintain public debt at prudent levels, can help economies withstand adverse shocks. Other policy options, such as addressing biases in tax codes that favour debt financing and targeted macro-prudential policies, will help bring down debt levels and address future run ups in debt.

Keywords: Debt, Macroeconomic stability

JEL Classification: E32, E6, G20, H63

Suggested Citation

Sutherland, Douglas and Hoeller, Peter and Merola, Rossana and Ziemann, Volker, Debt and Macroeconomic Stability (December 1, 2012). OECD Economics Department Working Paper No. 1003, Available at SSRN: https://ssrn.com/abstract=2188908 or http://dx.doi.org/10.2139/ssrn.2188908

Douglas Sutherland (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

Peter Hoeller

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Rossana Merola

International Labour Organization (ILO) ( email )

Route des Morillons 4
Geneva, 1211
Switzerland

Volker Ziemann

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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