Debt levels have surged since the mid-1990s and have reached historic highs across the OECD. High
debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks.
Furthermore, high debt levels hinder the ability of households and enterprises to smooth consumption and
investment and of governments to cushion adverse shocks. The empirical evidence suggests that when
private sector debt levels, particularly for households, rise above trend the likelihood of recession
increases. Measures of financial leverage give less warning and typically only deteriorate once the
economy begins to slow and asset prices are falling. Government debt typically rises after the onset of a
recession, suggesting that there is a migration of debt across balance sheets. Some policies, such as robust
micro prudential regulation and frameworks to deal with debt overhangs and maintain public debt at
prudent levels, can help economies withstand adverse shocks. Other policy options, such as addressing
biases in tax codes that favour debt financing and targeted macro-prudential policies, will help bring down
debt levels and address future run ups in debt.
