Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics

37 Pages Posted: 15 Dec 2012 Last revised: 21 Dec 2012

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)

Date Written: December 1, 2012

Abstract

How does debt affect macroeconomic stability? The answer to this question has important implications, because both public and private debt levels have reached historic highs across the OECD. While accumulating debt can help smooth real activity, at high levels debt creates weaknesses in corporate, household and government balance sheets. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks across the economy and internationally. The empirical evidence shows that high debt levels impair the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks. The empirical evidence also suggests that when private sector debt levels, particularly for households, rise above trend the likelihood of recession increases. Furthermore, when debt levels are high, recessions tend to be more severe.

Keywords: Debt, macroeconomic stability, business cycles, recession

JEL Classification: E62, H50, H68, J11

Suggested Citation

Sutherland, Douglas and Hoeller, Peter, Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics (December 1, 2012). OECD Economics Department Working Paper No. 1006, Available at SSRN: https://ssrn.com/abstract=2188941 or http://dx.doi.org/10.2139/ssrn.2188941

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

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