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Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment

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  • Carlos Cuerpo
  • Inês Drumond
  • Julia Lendvai
  • Peter Pontuch
  • Rafal Raciborski
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    Abstract

    The current crisis revealed the unsustainability of private sector indebtedness levels, fuelled, in the recent past, by a prolonged period of rapid credit expansion in some EU Member States. The deleveraging process that is now taking place, although necessary, stands as a source of concern in terms of its implications for economic activity. Against this background, this paper aims to (i) identify the EU Member States that are currently facing deleveraging pressures in the non-financial private sector, making use of the informational content of various indebtedness indicators; (ii) assess quantitatively those pressures, using both a threshold approach, which compares the current level of households and non-financial corporations' debt with a static benchmark, and a stationarity approach, which goes a step further by taking into account valuation effects and the possibility of a time-varying "sustainable" level of indebtedness; (iii) refine the link between the identified deleveraging pressures and the actual adjustment of indebtedness through an analysis of the credit supply and demand conditions in each Member State; (iv) simulate the impact of a households' sector deleveraging shock using a dynamic stochastic general equilibrium model and assess the transmission mechanism through which such a shock influences the economic activity. Some policy implications are also discussed in the concluding section.

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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 477.

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    Length: 52 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:euf:ecopap:0477

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    Cited by:
    1. Oblath, Gábor & Halpern, László, 2014. "A gazdagsági stagnálás "színe" és fonákja. Mivel jár együtt az exporttöbblet és az adósságcsökkenés?
      [The bright" and gloomy side of economic stagnation]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 757-800.

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