Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly
IMF Working Papers, May 23, 2016
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- Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly
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Bibliographic details
- Authors: Nicoletta Batini, Giovanni Melina, Stefania Villa
- Published: May 23, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484365502.001
Overview and research question
- Authors: Nicoletta Batini, Giovanni Melina, Stefania Villa
- Publication date: May 23, 2016
- Series: Working Paper No. 2016/104; Issue: 104; Volume: 2016; Pages: 41
- DOI: https://doi.org/10.5089/9781484365502.001
- Stock No: WPIEA2016104
- ISBN: 9781484365502
- ISSN: 1018-5941
- Core question: Revisit the empirical relationship between private/public debt and output and build a model that reproduces that relationship.
Empirical findings
- Surges in private debt are potentially more damaging for the economy than surges in public debt.
- The data motivate a model where government financial assistance to credit-constrained agents mitigates deleveraging.
Model features and mechanisms
- The model reproduces the observed empirical relationship between private/public debt and output.
- Key modeling elements (as described in the source):
- Credit-constrained agents who may deleverage.
- Government provision of financial assistance to these agents.
- Interactions that produce debt-deflation dynamics and debt-deflation effects.
- Use of collateralized borrowing and borrowing constraints in generating outcomes.
- Framework consistent with DSGE modeling and utility function specifications referenced in keywords.
Policy implications and recommendations
- Capping leverage:
- Leads to milder recessions.
- Implies more muted expansions.
- Fiscal buffers and intervention:
- 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.
- Policy trade-offs emphasized:
- There is a trade-off between reduced downside in recessions and subdued upside in expansions when leverage is capped.
- Effectiveness of fiscal support depends on available fiscal space and proximity to fiscal limits.
Subjects and keywords (as listed)
- 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
Source: IMF Working Paper "Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly", Nicoletta Batini, Giovanni Melina, Stefania Villa, May 23, 2016; Working Paper No. 2016/104; 41 pages; DOI: https://doi.org/10.5089/9781484365502.001.