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Debt reduction after crises

Author

Listed:
  • Garry Tang
  • Christian Upper

Abstract

Financial crises tend to be followed by a protracted period of debt reduction in the nonfinancial private sector. We find that a period of debt reduction followed 17 out of 20 systemic banking crises that were preceded by surges in credit. Debt/GDP ratios fell by an average of 38 percentage points, returning to approximately the levels seen before the increase. If history is any guide, we should expect to see a much more significant reduction in private sector debt, particularly of households, than has so far taken place after the recent crisis. The costs of this process in forgone output are difficult to pin down, but there are reasons to believe that they need not be high provided that the banking sector problems that led to the crisis are fixed.

Suggested Citation

  • Garry Tang & Christian Upper, 2010. "Debt reduction after crises," BIS Quarterly Review, Bank for International Settlements, September.
  • Handle: RePEc:bis:bisqtr:1009e
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. Wako Watanabe, 2007. "Prudential Regulation and the "Credit Crunch": Evidence from Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 639-665, March.
    4. Claudio Borio & Bent Vale & Goetz von Peter, 2010. "Resolving the financial crisis: are we heeding the lessons from the Nordics?," Working Paper 2010/17, Norges Bank.
    5. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2009. "What happens during recessions, crunches and busts?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 653-700, October.
    6. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
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    Citations

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    Cited by:

    1. Claudio Borio, 2014. "The financial cycle and macroeconomics: what have we learned and what are the policy implications?," Chapters,in: Financial Cycles and the Real Economy, chapter 2, pages 10-35 Edward Elgar Publishing.
    2. Mikael Juselius & Claudio Borio & Piti Disyatat & Mathias Drehmann, 2017. "Monetary Policy, the Financial Cycle, and Ultra-Low Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 55-89, September.
    3. Daan Steenkamp, 2010. "New Zealand’s imbalances in a cross-country context," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, pages 37-49, December.
    4. repec:wsi:serxxx:v:62:y:2017:i:01:n:s0217590817400045 is not listed on IDEAS
    5. Cussen, Mary & O'Leary, Brídín, 2013. "Why are Irish Non-Financial Corporations so Indebted?," Quarterly Bulletin Articles, Central Bank of Ireland, pages 104-118, January.
    6. Vratilav Izák, 2014. "Private and Public Debt," European Financial and Accounting Journal, University of Economics, Prague, vol. 2014(1).
    7. Daniel Garrote & Jimena Llopis & Javier Vallés, 2013. "Los canales del desapalancamiento del sector privado: una comparación internacional," Occasional Papers 1302, Banco de España;Occasional Papers Homepage.
    8. Siti Aminah Mainal, 2017. "Post Financial Crisis and Macroeconomic Fundamentals on Household Debt in Advanced Economies," GATR Journals jfbr133, Global Academy of Training and Research (GATR) Enterprise.
    9. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
    10. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
    11. Döhrn, Roland & an de Meulen, Philipp & Kitlinski, Tobias & Schmidt, Torsten & Vosen, Simeon, 2010. "Die wirtschaftliche Entwicklung im Ausland: Der erste Schwung ist vorüber," RWI Konjunkturberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, vol. 61(2), pages 5-36.
    12. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
    13. Julia Kiraly & Atila Csajbok & Mihaly Andras Kovacs, 2011. "A Policy Recipe for Successful Convergence of CESEE Countries in the Post-crisis World," Chapters,in: Post-Crisis Growth and Integration in Europe, chapter 12 Edward Elgar Publishing.
    14. Cuerpo, Carlos & Drumond, Inês & Lendvai, Julia & Pontuch, Peter & Raciborski, Rafal, 2015. "Private sector deleveraging in Europe," Economic Modelling, Elsevier, vol. 44(C), pages 372-383.
    15. Martin Gächter & Martin Geiger & Florentin Glötzl & Helene Schuberth, 2015. "Sectoral Deleveraging in Europe and Its Economic Implications," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-23.
    16. Roland Döhrn & Philipp an de Meulen & Tobias Kitlinski & Torsten Schmidt & Simeon Vosen, 2010. "Die wirtschaftliche Entwicklung im Ausland zur Jahresmitte 2010 - Der erste Schwung ist vorüber," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 32, 09.
    17. Don Walshe & Dermot O’Leary, 2012. "Deleveraging, Banks and Economic Recovery in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 43(1), pages 165-197.
    18. Martti Randveer & Lenno Uuskula & Liina Kulu, 2012. "The impact of private debt on economic growth," Bank of Estonia Working Papers wp2011-10, Bank of Estonia, revised 05 Jan 2012.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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