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Over-indebtedness: interaction between public and private debt

14th National Competition for Economic Research Grants

International economics

Senior Researcher : Hernán Daniel Seoane Bernadaz

Research Centre or Institution : Universidad Carlos III de Madrid.

Abstract

The aim of this project is to contribute to the study of the relationship between the borrowing decisions of the public sector and the private sector through an approach which is both empirical and theoretical. Although we are interested in understanding the behaviour of these variables in general, one of the specific aims of this project is to apply our analysis to the European economies that have been exposed to the recent debt crisis. We will focus on documenting and understanding their correlation and the reasons behind the interaction among these variables, as well as their dynamics over the course of the economic cycle.

The existing literature suggests that the levels of debt of the different economic agents can contribute to financial instability and the exposure of economies to systemic financial and macro-economic risks. In particular, a recently-coined concept is that of the "Over-indebtedness Syndrome", which occurs when the economic agents accumulate debt levels which are inefficiently high. A situation of over-indebtedness may, with greater or lesser likelihood, lead to a debt crisis and capital flight.

This project is important not only from the theoretical point of view, but also for decision-making with regard to economic policy. For the appropriate design of preventive or bailout policies (macro-prudential and ex-post stabilisation policies, respectively), it is necessary to identify the agent that has accumulated levels of over-indebtedness and the reasons behind that phenomenon.

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