Household Debt, Corporate Debt, and the Real Economy: Some Empirical Evidence

Donghyun Park,Kwanho Shin,Shu Tian

doi:10.1080/1540496x.2021.1895114

Abstract

ABSTRACT The rapid accumulation of private debt is widely viewed as a major risk to financial and economic stability. This article systematically and comprehensively assesses the effect of private debt buildup on economic growth. In the spirit of the existing study that separately examines the effects of two types of private debt – household debt and corporate debt – on growth in advanced economies, we specifically provide new evidence on the growth-private debt nexus in both advanced and emerging market economies (EMEs). Moreover, we construct financial peaks in terms of the speed of debt accumulation rather than crisis dates and find that in both advanced and EMEs, corporate debt buildups cause more financial peaks than household debt buildups. Furthermore, corporate debt-induced financial recessions inflict a bigger damage on output than household debt-induced financial recessions in EMEs. Overall, our evidence suggests that policymakers would do well to closely monitor not only household debt but also corporate debt.

Highlights

The rapid accumulation of private debt is widely viewed as a major risk to financial and economic stability.1 the unsustainable buildup of public debt due to unsound fiscal policies has led to many crises.2 The eurozone sovereign debt crisis was a recent fiscal crisis in advanced economies, and there were many episodes of fiscal crisis in emerging market economies (EMEs)
Our results suggest that corporate debt has a more negative impact on investment growth than household debt, and this feature is more pronounced in EMEs
We try to systematically and comprehensively explore the impact of both household and corporate debts buildups on the real economy in both advanced economies and EMEs

Summary

INTRODUCTION

The rapid accumulation of private debt is widely viewed as a major risk to financial and economic stability. the unsustainable buildup of public debt due to unsound fiscal policies has led to many crises. The eurozone sovereign debt crisis was a recent fiscal crisis in advanced economies, and there were many episodes of fiscal crisis in emerging market economies (EMEs). 8 Many papers surveyed emphasize the speed of expansion, not the level of financial debts that constitutes a risk of the economy. 2 | ADB Economics Working Paper Series No 567 output, consumption, investment, and asset–price growth) of the two different types of private debts in EMEs.. 2 | ADB Economics Working Paper Series No 567 output, consumption, investment, and asset–price growth) of the two different types of private debts in EMEs.10 We identify normal versus financial peaks, and investigate whether the two types of peaks entail any differences in how household and corporate debts affect postpeak recession path.

LITERATURE REVIEW

NORMAL PEAKS VERSUS FINANCIAL PEAKS

CONCLUDING OBSERVATIONS

42 | Appendix

Findings

44 | References