Excessive private sector leverage and its drivers: evidence from advanced economies

Mariusz Jarmuzek and Rossen Rozenov

Applied Economics, 2019, vol. 51, issue 34, 3787-3803

Abstract: The paper provides novel quantitative assessments of the gaps between actual and sustainable levels of debt for households and corporates in selected advanced economies, revealing considerable heterogeneity across sectors and countries. The accumulation of gaps is found to precede financial distress. The paper also identifies key factors that drive excessive debt, separately for households and corporates. For households, excessive leverage is found to be higher in countries with lower interest rates and higher share of working population, but importantly also in countries with rising house prices and greater uncertainty as captured by unemployment. For corporates, debt overhang is estimated to be higher in countries with lower profitability, stronger insolvency frameworks and in absence of thin capitalization rules. There is therefore scope for the use of policy to limit the build-up of household and corporate debt overhang.

Date: 2019
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Working Paper: Excessive Private Sector Leverage and Its Drivers: Evidence from Advanced Economies (2017)
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DOI: 10.1080/00036846.2019.1584383

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