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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.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
Debt and Macroeconomic Stability: Debt and the Business Cycle
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- Volker Ziemann1
- Author Affiliations
- 1: OECD, France
- 04 Dec 2012
- Bibliographic information
Using a large panel of OECD countries this paper studies the link between debt and macroeconomic stability by comparing the evolution of balance sheet aggregates and economic output in high- and lowdebt environments. While the relationship between debt and economic growth has been extensively studied in the literature, only little attention has been paid to the impact of debt on volatility and higher moments of output growth distributions. This paper fills in this gap. Debt-fuelled expansions are found to typically last longer but to culminate in a more sizeable downturn. The greater amplitude of business cycles in high-debt environments reflects higher macroeconomic volatility but also higher tail risks and adverse asymmetries in output growth distributions. The induced welfare losses justify policy interventions aiming at preventing excessive build-ups in debt ex-ante.
- amplitude of business cycles, macroeconomic stability, debt
- JEL Classification:
- C23: Mathematical and Quantitative Methods / Single Equation Models ; Single Variables / Panel Data Models ; Spatio-temporal Models
- E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations ; Cycles
- E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy
- F34: International Economics / International Finance / International Lending and Debt Problems
- G01: Financial Economics / General / Financial Crises
- H63: Public Economics / National Budget, Deficit, and Debt / Debt ; Debt Management ; Sovereign Debt