Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly

By Nicoletta Batini, Giovanni Melina, Stefania Villa

May 23, 2016

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Nicoletta Batini, Giovanni Melina, and Stefania Villa. Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly, (USA: International Monetary Fund, 2016) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.

Subject: Fiscal policy, Fiscal space, Housing, Housing prices, National accounts, Prices, Private debt, Public debt

Keywords: Borrowing constraints, Debt collateral, Debt deflation dynamics, Debt deflation effect, Debt obligation, DSGE, Fiscal limits, Fiscal space, GDP ratio, Global, Housing, Housing prices, Nominal interest rate, Private debt, Private sector, Public debt, Public debt-to-GDP, Utility function, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/104
Stock No:

WPIEA2016104
ISBN:

9781484365502
ISSN:

1018-5941

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