Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly
42 Pages Posted: 9 Dec 2016
Date Written: May 2016
We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.
Keywords: Debt, Private sector, Government expenditures, Borrowing, Public debt, Fiscal consolidation, General equilibrium models, private debt, public debt, borrowing constraints, fiscal limits, DSGE
JEL Classification: E44, E62
Suggested Citation: Suggested Citation