Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly

42 Pages Posted: 9 Dec 2016

See all articles by Nicoletta Batini

Nicoletta Batini

International Monetary Fund (IMF)

Giovanni Melina

International Monetary Fund (IMF)

Stefania Villa

University of Foggia; KU Leuven - Faculty of Business and Economics (FEB)

Date Written: May 2016

Abstract

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

Batini, Nicoletta and Melina, Giovanni and Villa, Stefania, Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly (May 2016). IMF Working Paper No. 16/104. Available at SSRN: https://ssrn.com/abstract=2882517

Nicoletta Batini (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Giovanni Melina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Stefania Villa

University of Foggia

Largo Papa Giovanni Paolo
Foggia, 71100
Italy

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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