Debt and Macroeconomic stability: The perils of high debt and how to avoid them
Policy Note No. 16
Debt Burdens, guest commentary in Bloomberg Brief, Economic European Edition, 01.18.13
- Public and private debt levels are very high by historical standards. OECD-wide total financial liabilities now exceed 1 000% of GDP.
- High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks.
- High debt levels hinder the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks.
- When private sector debt levels, particularly for households, rise above trend the likelihood of a sharp economic downturn increases.
- Measures of financial leverage give less warning of an impending recession and typically only deteriorate once the economy begins to slow and asset prices are falling.
- During a recession debt typically migrates from the private sector to the government sector.
- Targeted macro-prudential policies would help in addressing future run-ups in debt.
- Robust micro prudential regulation and maintaining public debt at prudent levels can help economies cope with adverse shocks.
- Legal frameworks can facilitate debt write-downs, but this may come at the price of a higher cost of capital.