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Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics

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  • Douglas Sutherland
  • Peter Hoeller

Abstract

How does debt affect macroeconomic stability? The answer to this question has important implications, because both public and private debt levels have reached historic highs across the OECD. While accumulating debt can help smooth real activity, at high levels debt creates weaknesses in corporate, household and government balance sheets. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks across the economy and internationally. The empirical evidence shows that high debt levels impair the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks. The empirical evidence also suggests that when private sector debt levels, particularly for households, rise above trend the likelihood of recession increases. Furthermore, when debt levels are high, recessions tend to be more severe. Dette et stabilité macroéconomique : Aperçu général des études existantes et faits constatés Quels sont les effets de l’endettement sur la stabilité macroéconomique ? La réponse à cette question a des conséquences importantes car les niveaux d’endettement publics et privés atteignent des sommets historiques dans les pays de l’OCDE. S’il est vrai que l’accumulation de dettes peut aider à lisser l’activité réelle, un endettement élevé affaiblit les bilans des entreprises, des ménages et de l’État. Un fort endettement peut être à l’origine de vulnérabilités, qui amplifient et répercutent les chocs macroéconomiques et les variations des prix des actifs dans l’économie et au plan international. L’expérience montre que des niveaux élevés d’endettement limitent la possibilité pour les ménages et les entreprises de lisser leur consommation et leurs investissements et, pour les gouvernements, d’amortir les chocs défavorables. Les données d’observations semblent aussi indiquer que lorsque la dette du secteur privé, en particulier celle des ménages, dépasse la tendance, la probabilité de récession s’accroît. Par ailleurs, lorsque les niveaux d’endettement sont élevés, les récessions sont généralement plus sévères.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 1006.

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Date of creation: 07 Dec 2012
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Handle: RePEc:oec:ecoaaa:1006-en
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Keywords: recession; business cycle; macroeconomic stability; debt; récession; cycles économiques; dette; stabilité macroéconomique;

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Cited by:

  1. Henrik Braconier & Giuseppe Nicoletti & Ben Westmore, 2014. "Policy Challenges for the Next 50 Years," OECD Economic Policy Papers 9, OECD Publishing.
  2. Christophe André, 2016. "Household debt in OECD countries: Stylised facts and policy issues," OECD Economics Department Working Papers 1277, OECD Publishing.
  3. Mikkel Hermansen & Oliver Röhn, 2015. "Economic resilience: The usefulness of early warning indicators in OECD countries," OECD Economics Department Working Papers 1250, OECD Publishing.
  4. Kamil Galuscak & Petr Hlavac & Petr Jakubik, 2014. "Stress Testing the Private Household Sector Using Microdata," Working Papers 2014/02, Czech National Bank, Research Department.
  5. Clayton, Maya & Liñares-Zegarra, José & Wilson, John O.S., 2015. "Does debt affect health? Cross country evidence on the debt-health nexus," Social Science & Medicine, Elsevier, vol. 130(C), pages 51-58.
  6. Puente-Ajovín, Miguel & Sanso-Navarro, Marcos, 2015. "Granger causality between debt and growth: Evidence from OECD countries," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 66-77.
  7. Oliver Röhn & Aida Caldera Sánchez & Mikkel Hermansen & Morten Rasmussen, 2015. "Economic resilience: A new set of vulnerability indicators for OECD countries," OECD Economics Department Working Papers 1249, OECD Publishing.
  8. Aida Caldera Sánchez & Morten Rasmussen & Oliver Röhn, 2015. "Economic resilience: what role for policies?," OECD Economics Department Working Papers 1251, OECD Publishing.
  9. Atif Ansar & Bent Flyvbjerg & Alexander Budzier & Daniel Lunn, 2016. "Does infrastructure investment lead to economic growth or economic fragility? Evidence from China," Oxford Review of Economic Policy, Oxford University Press, vol. 32(3), pages 360-390.

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