Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly

Nicoletta Batini, Giovanni Melina and Stefania Villa

No 2016/104, IMF Working Papers from International Monetary Fund

Abstract: We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.

Keywords: WP; private sector; private debt; public debt; borrowing constraints; fiscal limits; DSGE; GDP ratio; debt deflation dynamics; public debt-to-GDP; debt deflation effect; debt obligation; nominal interest rate; debt collateral; utility function; Housing prices; Fiscal space; Housing; Global (search for similar items in EconPapers)
Pages: 41
Date: 2016-05-23
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Citations: View citations in EconPapers (15)

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