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Austerity and Private Debt
Author(s) -
KLEIN MATHIAS
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12424
Subject(s) - austerity , debt overhang , debt , monetary economics , economics , internal debt , business cycle , debt to gdp ratio , external debt , government debt , fiscal policy , economic policy , macroeconomics , political science , politics , law
This study provides empirical evidence that the costs of austerity crucially depend on the level of private indebtedness. In particular, fiscal consolidations lead to severe contractions when implemented in high private‐debt states. Contrary, fiscal consolidations have no significant effect on economic activity when private debt is low. These results are robust to alternative definitions of private‐debt overhang, the composition of fiscal consolidations, and controlling for the state of the business cycle and government debt overhang. I show that deterioration in household balance sheets is important to understand private debt‐dependent effects of austerity.