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.
