Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics
37 Pages Posted: 15 Dec 2012 Last revised: 21 Dec 2012
Date Written: December 1, 2012
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: Suggested Citation