The impact of private debt on economic growth

Martti Randveer (), Lenno Uusküla and Liina Kulu ()

No wp2011-10, Bank of Estonia Working Papers from Bank of Estonia

Abstract: Both theoretical and empirical evidence show that recessions are steeper in countries with high levels of private debt and/or credit booms. But do these negative effects carry over to the period where the recession is over and the economy recovers from the crisis? In this paper we look at economic recovery episodes and relate the growth performance of countries with their debt levels and debt growth before the beginning of the recession. We find that a higher level of debt before a recession is correlated with smaller economic growth after the economic slowdown has finished. In contrast, higher credit growth before a recession is associated with higher GDP growth after the crisis. The effects of debt on consumption are more negative, implying that after recessions people consume less and save more than they did in the period before the recession. However, the overall economic effects of the debt measures on GDP and consumption growth are limited

Keywords: private debt; recession; economic growth; consumption (search for similar items in EconPapers)
JEL-codes: E32 E44 O16 (search for similar items in EconPapers)
Date: 2012-01-05, Revised 2012-01-05
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Citations: View citations in EconPapers (2)

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