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The impact of private debt on economic growth

  • Martti Randveer

    ()

  • Lenno Uusküla

    ()

  • Liina Kulu

    ()

Both theoretical and empirical evidence show that recessions are steeper in countries with high levels of private debt and/or credit booms. But do these negative effects carry over to the period where the recession is over and the economy recovers from the crisis? In this paper we look at economic recovery episodes and relate the growth performance of countries with their debt levels and debt growth before the beginning of the recession. We find that a higher level of debt before a recession is correlated with smaller economic growth after the economic slowdown has finished. In contrast, higher credit growth before a recession is associated with higher GDP growth after the crisis. The effects of debt on consumption are more negative, implying that after recessions people consume less and save more than they did in the period before the recession. However, the overall economic effects of the debt measures on GDP and consumption growth are limited

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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number wp2011-10.

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Date of creation: 05 Jan 2012
Date of revision: 05 Jan 2012
Handle: RePEc:eea:boewps:wp2011-10
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  1. Garry Tang & Christian Upper, 2010. "Debt reduction after crises," BIS Quarterly Review, Bank for International Settlements, September.
  2. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  3. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers 08/266, International Monetary Fund.
  4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  5. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, May.
  6. Kazuo Ogawa, 2003. "Financial Distress and Corporate Investment: The Japanese Case in the 90s," ISER Discussion Paper 0584, Institute of Social and Economic Research, Osaka University.
  7. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  8. Lenno Uusküla & Peeter Luikmel & Jana Kask, 2005. "Critical Levels of Debt?," Bank of Estonia Working Papers 2005-3, Bank of Estonia, revised 10 Oct 2005.
  9. Kazuo Ogawa, 2003. "Financial Distress and Employment: The Japanese Case in the 90s," NBER Working Papers 9646, National Bureau of Economic Research, Inc.
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