The role of debt in financial crises: lessons from the past

Pedro Duarte Neves

Chapter 5 in Research Handbook of Macroprudential Policy, 2026, pp 93-111 from Edward Elgar Publishing

Abstract: This chapter synthesises empirical evidence on the role of debt in financial crises, identifying 20 stylised facts on their causes, consequences, and policy implications. It shows that credit booms – especially those driven by mortgage lending, construction, or asset price bubbles – are often followed by financial instability or prolonged stagnation. Post-crisis periods are marked by rising debt, non-performing loans, and weaker recoveries. Macroprudential policy, particularly when used pre-emptively, is effective in mitigating these dynamics. The chapter highlights the importance of fiscal space, bank capital, and coordinated policy frameworks in enhancing economic resilience and managing the risks associated with high indebtedness.

Keywords: Credit booms; Financial crisis; Debt overhang; Economic policy (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035306206
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