Bailing Out the People? When Private Debt Becomes Public

46 Pages Posted: 1 Aug 2018

See all articles by Samba MBaye

Samba MBaye

International Monetary Fund (IMF)

Marialuz Moreno Badia

International Monetary Fund (IMF)

Kyungla Chae

International Monetary Fund (IMF)

Date Written: June 2018

Abstract

This paper documents a form of private sector bailout that is much more common (and yet unnoticed) than the typical bank bailout. Building on the newly-created Global Debt Database, we show that excess private debt systematically turns into higher public debt, regardless of whether the credit boom resulted in a crisis or a more orderly deleveraging process. This debt migration operates mainly through growth rather than explicit bailouts: private deleveraging weighs on activity, prompting a countercyclical government response to support economic activity. Ultimately, whether this debt substitution results in a net increase or a net decline of overall indebtedness in the economy depends on the extent of the growth slowdown during the deleveraging spell. These findings suggest that markets and policymakers should move away from looking at private and sovereign debt in silos and pay closer attention to the total stock of debt in the economy, as the line between the two tends to become blurry.

Keywords: Public debt, deleveraging, private debt, leverage cycles, bailout, Financial Markets and the Macroeconomy, International Lending and Debt Problems, International Business Cycles, General, International, or Comparative

JEL Classification: E44, F34, F44, H63, N20

Suggested Citation

MBaye, Samba and Moreno-Badia, Marialuz and Chae, Kyungla, Bailing Out the People? When Private Debt Becomes Public (June 2018). IMF Working Paper No. 18/141, Available at SSRN: https://ssrn.com/abstract=3221228

Samba MBaye (Contact Author)

International Monetary Fund (IMF) ( email )

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

Marialuz Moreno-Badia

International Monetary Fund (IMF) ( email )

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

Kyungla Chae

International Monetary Fund (IMF) ( email )

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

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