The Role of Private Debt in Determining the Impact of a Financial Crisis: Evidence from System-GMM OECD Panel Data

Abstract

This paper considers the role of private debt in determining the impact of a financial crisis. By examining both theoretical and empirical aspects of this topic, I address the following key questions. What are the risks to the broader economy associated with high private and household debt? What are the mechanisms by which private debt and deleveraging may restrain economic activity? Using evidence from a panel dataset of OECD countries over the period 1981-2016, I argue that high household debt levels aggravate crises in the following ways: recessions are deeper, and recoveries are weaker, when they are preceeded by larger surges in household debt. Analogous observations are made for booms and busts in the housing market.