Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly
Electronic Access:
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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.
Series:
Working Paper No. 2016/104
Subject:
Fiscal policy Fiscal space Housing Housing prices National accounts Prices Private debt Public debt
English
Publication Date:
May 23, 2016
ISBN/ISSN:
9781484365502/1018-5941
Stock No:
WPIEA2016104
Pages:
41
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