Debt and Depth of Recessions

36 Pages Posted: 4 May 2020

See all articles by Donghyun Park

Donghyun Park

Asian Development Bank - Economic Research

Kwanho Shin

Korea University

Grace Tian

Asian Development Bank

Date Written: April 26, 2019


This paper empirically investigates the relationship between the speed of buildup of private debt (household and corporate) and the depth of recessions. To do this, we differentiate between financial recessions and normal recessions on the basis of how quickly their private debt builds up. In addition to output recessions, we look at consumption and investment recessions. We find that financial recessions are deeper than normal recessions in advanced economies—and the differences become even more pronounced when emerging market economies are added to the sample. Our evidence suggests that a buildup in corporate debt is especially damaging for emerging markets during financial recessions. A higher ratio of debt to gross domestic product—in other words, less fiscal space—exacerbates recessions only beyond a certain threshold level, suggesting a nonlinear effect. We find that the buildup of corporate debt—and not just household debt—can worsen recessions, especially in emerging market economies.

Keywords: business cycle, corporate debt, fiscal space, government debt, household debt, private debt, recessions

JEL Classification: E32, E44, G01

Suggested Citation

Park, Donghyun and Shin, Kwanho and Tian, Shu, Debt and Depth of Recessions (April 26, 2019). Asian Development Bank Economics Working Paper Series No. 579, Available at SSRN: or

Donghyun Park (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila

Kwanho Shin

Korea University ( email )

1 Anam-dong 5 ka
Sunbuk-Ku, Department of Economics
Seoul 136-701
82-2-3290-2220 (Phone)
82-2-3290-2719 (Fax)


Shu Tian

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila

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