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Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment

Author(s): Carlos Cuerpo, Inês Drumond, Julia Lendvai, Peter Pontuch and Rafal Raciborski

Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustmentpdf(2 MB) Choose translations of the previous link 

Summary for non-specialistspdf(73 kB) Choose translations of the previous link 

The current crisis revealed the unsustainability of private sector indebtedness levels, fuelled, in the recent past, by a prolonged period of rapid credit expansion in some EU Member States. The deleveraging process that is now taking place, although necessary, stands as a source of concern in terms of its implications for economic activity. Against this background, this paper aims to (i) identify the EU Member States that are currently facing deleveraging pressures in the non-financial private sector, making use of the informational content of various indebtedness indicators; (ii) assess quantitatively those pressures, using both a threshold approach, which compares the current level of households and non-financial corporations' debt with a static benchmark, and a stationarity approach, which goes a step further by taking into account valuation effects and the possibility of a time-varying "sustainable" level of indebtedness; (iii) refine the link between the identified deleveraging pressures and the actual adjustment of indebtedness through an analysis of the credit supply and demand conditions in each Member State; (iv) simulate the impact of a households' sector deleveraging shock using a dynamic stochastic general equilibrium model and assess the transmission mechanism through which such a shock influences the economic activity. Some policy implications are also discussed in the concluding section.

(European Economy. Economic Papers 477. April 2013. Brussels. PDF. 52pp. Tab. Graph. Ann. Free.)

KC-AI-13-477-EN-N (online)
ISBN 978-92-79-28428-1 (online)
doi: 10.2765/3941 (online)

JEL classification: E21, E44, H 31, C54

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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