Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment
AbstractThe 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 InfoPaper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 477.
Length: 52 pages
Date of creation: Apr 2013
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Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
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