Debt and Macroeconomic Stability

Abstract

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Financial stability and sectoral debts: overview of research problems

“…During last two decades debts increased substantially in OECD countries (Sutherland et al, 2012). Which is a warning signal as indebtedness level is a very important variable influencing financial stability.…”

Financial fragility in the Great Moderation

“…Greater-than-usual stability is so both caused by more generous credit conditions, and encourages financial innovation and further expansion of credit and leverage. Leverage, in turn, increases financial fragility, measured as vulnerability to asset prices changes (Sutherland et al, 2012). Financial innovations also increase financial fragility (Beck et al, 2012b;Gennaioli et al, 2013).…”

Effects of Economic Policies on Microeconomic Stability

“…An important dimension is the effect of growthenhancing policies on economic stability, which recent studies for the Working Party have assessed at the macroeconomic level (Sutherland et al, 2012;Ziemann, 2013;Sutherland and Hoeller, 2013). From a welfare perspective, instability at the level of individual workers or households is even more relevant.…”

“…Indeed, financial deregulation induces greater risk-taking in the financial sector which often creates negative externalities on other sectors trough more volatile credit growth and a higher probability of financial turmoil and credit crunches (Korinek and Kreamer, 2013;Sutherland et al, 2012). Similarly, Brunnermeier and Sannikov (2014) show that a large and innovative financial sector can lead to the paradoxical situation where instruments meant to better manage risks and diversify idiosyncratic risk may actually increase systemic risks and instability.…”

“…Better inventory management has indeed been identified as one of the main microeconomic drivers of the decline in aggregate output volatility prior to the Great Recession (Davis and Kahn, 2008). Moreover, greater financial development in principle helps individual firms to smooth transitory shocks, although aggregate financial over-extension can generate macro-level instability (Sutherland et al, 2012).…”