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.
