Private Sector Deleveraging and Growth Following Busts

Abstract

Balance sheet recessions have been a drag on activity after the Global Financial Crisis, underscoring the important role of balance sheet adjustment for resuming sustained growth. In this paper we examine private sector deleveraging experiences across 36 advanced and emerging economies countries since 1960. We consider the common features and divergent experiences of deleveraging episodes across countries, and analyze empirically the impact of different aspects of deleveraging during the bust phase of leverage cycles on subsequent medium-term growth. The results suggest that larger and quicker unwinding of non-financial sector debt overhangs is associated with sizable medium-term output gains, and that policies should focus on facilitating up-front balance sheet adjustment.

Private debt overhang and the government spending multiplier: Evidence for the United States

“…In particular, the analysis in Persons (1930), Mishkin (1978), and Mian and Sufi (2014), among others, suggests that the increasing weakness of borrowers' balance sheets has contributed to the cause and the severity of both crises. Furthermore, the second episode is consistent with Chen, Kim, Otte, Wiseman, and Zdzienicka (2015) and Mishkin (1977), who identify an era of household debt deleveraging starting in the mid-1960s which, in turn, signals a preexisting condition of high private indebtedness. Finally, the third episode can be linked to the boom and bust phases of bank lending around the so-called Savings & Loan Crisis; that is, a large-scale failure of financial institutions specialized in the collection of deposits in order to provide loans to households and firms.…”

Macroeconomic Imbalances in the Euro Area: Where Do We Stand?

“…There appears to be some evidence that frontloaded deleveraging has been subsequently associated with stronger GDP per capita growth (Chen et al, 2015). This notwithstanding, it should be noted that a reduction in private debt ratios via balance sheet deleveraging might be associated with negative GDP effects (Eggertson and Krugman, 2010).…”