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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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Debt and Macroeconomic Stability: Case studies
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- Rossana Merola1
- Author Affiliations
- 1: OECD, France
- 07 Dec 2012
- Bibliographic information
Accumulating debt raises concerns about its implications for macroeconomic stability. This paper sheds light on the implications of high indebtedness for the macroeconomic volatility by identifying the main drivers of the evolution of debt in a set of countries. The country choice was based on large deleveraging episodes of total economy debt, identified by turning point dating. The analysis shows that GDP is more volatile in the phase of deleveraging. However, countries can be distinguished into two groups. In a first set of countries (Germany, Israel, Mexico and the United States) economic activity has often rebounded during the phase of deleveraging. On the contrary, in a second group of countries, the higher volatility during the deleveraging phase has been accompanied by sluggish economic activity. Countries in this second group (for instance, Japan and Sweden) share the common characteristic that higher indebtedness was driven by a boom in asset prices. When asset prices burst, the financial sector cuts credit supply, which weighs on economic activity. The results also suggest that many episodes of debt leveraging have been naturally driven by boom in asset price used as collateral or by financial liberalisation, which have facilitated excessive borrowing.
- deleveraging, debt management, cycles, case studies
- JEL Classification:
- E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy
- E65: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Studies of Particular Policy Episodes
- H60: Public Economics / National Budget, Deficit, and Debt / General
- H63: Public Economics / National Budget, Deficit, and Debt / Debt; Debt Management; Sovereign Debt