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Debt overhang: why recovery from a financial crisis can be slow

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  • Satyajit Chatterjee

Abstract

A particularly troublesome feature of the most recent recession has been the painfully slow growth in employment during the recovery. For employment growth to accelerate, economists believe that firms need to invest in new productive capacity. This view is typically couched in terms of the need to reallocate jobs away from crisis-depressed sectors into other sectors. But doing so requires an expansion in productive capacity in those other sectors. Tepid employment growth is a sign that this investment in new productive capacity has not been forthcoming. One reason for the reluctance to undertake productive investment following a financial crisis is debt overhang, a situation in which the existence of prior debt acts as a disincentive to new investment. There are other explanations that, to varying degrees, account for the current reluctance of U.S. corporations to invest. In this article, Satyajit Chatterjee focuses on the debt overhang problem.

Suggested Citation

  • Satyajit Chatterjee, 2013. "Debt overhang: why recovery from a financial crisis can be slow," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 1-9.
    • Handle: RePEc:fip:fedpbr:y:2013:i:q2:p:1-9
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    2. Filippo Occhino, 2010. "Is debt overhang causing firms to underinvest?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jul.
    3. Lamont, Owen, 1995. "Corporate-Debt Overhang and Macroeconomic Expectations," American Economic Review, American Economic Association, vol. 85(5), pages 1106-1117, December.
    4. 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.
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    Cited by:

    1. Mattia Osvaldo Picarelli & Willem Vanlaer & Wim Marneffe, 2019. "Does Public Debt Produce a Crowding Out Effect for Public Investment in the EU?," Working Papers 36, European Stability Mechanism.
    2. Willem Vanlaer & Wim Marneffe & Lode Vereeck & Johan Vanovertveldt, 2015. "Does debt predict growth? An empirical analysis of the relationship between total debt and economic output," European Journal of Government and Economics, Europa Grande, vol. 4(2), pages 79-103, December.
    3. Puonti, Päivi, 2022. "Public Debt and Economic Growth," ETLA Reports 127, The Research Institute of the Finnish Economy.

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