10/2011 Martti Randveer, Lenno Uusküla and Liina Kulu. The impact of private debt on economic growth

Working Papers of Eesti Pank. No. 10/2011

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.

JEL Code: E32, O16, E44

Keywords: private debt, recession, economic growth, consumption

Author's e-mail address: martti.randveer [at] eestipank.ee, lenno.uuskyla [at] eestipank.ee, liina.kulu [at] eestipank.ee

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The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank