Private Debt : Cycles and Growth

Open Access

Abstract

The level of private debt in the developed world is at historically high levels. This thesis investigates whether the private debt is associated with the economic crises and low growth rates experienced today. The purpose of the thesis is to answer three questions regarding private debt motivated by Steve Keen's work on private debt. First, is the level of private debt connected to lower economic growth. Second, are recessions preceded by growth in debt and followed by deleveraging deeper. Third, is the extension and accelerating expansion of private debt connected to other macroeconomic variables. The research questions are answered using econometric panel data models including LSDV and VAR models and the Jordà local projections framework. In addition, Reinhart and Rogoff's famous analysis is extended to private debt. Recently available panel data on private debt from the Bank of International Settlements and Jordà-Schularick-Taylor Macrohistory Database are used as the source of data. The findings of the thesis are consistent with Keen's arguments. High levels of private debt are associated with lower economic growth, arguably even more substantially than government debt. Recessions preceded by growth in debt and followed by deleveraging have been the worst recessions, and the extension and accelerating expansion of private debt can explain changes in GDP, unemployment, and house prices.