Debts and depth of recessions

Donghyun Park, Kwanho Shin, Shu Tian

Research output: Contribution to journalArticlepeer-review

Abstract

This paper empirically investigates the relationship between the speed of buildup of private debt (household and corporate) and the depth of recessions. To do this, we differentiate between financial recessions and normal recessions on the basis of how quickly their private debt builds up. In addition to output recessions, we look at consumption and investment recessions. We find that financial recessions are deeper than normal recessions in advanced economies—and the differences become even more pronounced when emerging market economies are added to the sample. Our evidence suggests that a buildup in corporate debt is especially damaging for emerging market during financial recessions. A higher ratio of debt to gross domestic product—in other words, less fiscal space—exacerbates recessions only beyond a certain threshold level, suggesting a nonlinear effect. We find that the buildup of corporate debt—and not just household debt—can worsen recessions, especially in emerging market economies.

Original languageEnglish
Pages (from-to)468-485
Number of pages18
JournalInternational Review of Economics and Finance
Volume87
DOIs
Publication statusPublished - 2023 Sept

Bibliographical note

Funding Information:
This paper was initially prepared for the ADB's Asian Development Outlook Update 2018: Maintaining Stability amid Heightened Uncertainty. An earlier version was published as an ADB working paper No. 579. We thank comments by Abdul Abiad and other workshop participants at the Asian Development Outlook Theme Chapter Mid-Term Workshop on 30–31 May 2018 . We also thank Jaeyoung Yoo for excellent research assistance, and ADB for financial support. Kwanho Shin acknowledes support from Korea University Grant K2305491 .

Funding Information:
This paper was initially prepared for the ADB's Asian Development Outlook Update 2018: Maintaining Stability amid Heightened Uncertainty. An earlier version was published as an ADB working paper No. 579. We thank comments by Abdul Abiad and other workshop participants at the Asian Development Outlook Theme Chapter Mid-Term Workshop on 30–31 May 2018. We also thank Jaeyoung Yoo for excellent research assistance, and ADB for financial support. Kwanho Shin acknowledes support from Korea University Grant K2305491.

Publisher Copyright:
© 2023

Keywords

  • Business cycle
  • Corporate debt
  • Fiscal space
  • Government debt
  • Household debt
  • Private debt
  • Recessions

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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