Bailing out the people: The public cost of excess private debt

a column by Samba Mbaye, Marialuz Moreno Badia and Kyungla Chae for VOX: CEPR’s Policy Portal

Since the financial crisis researchers have extensively explored the dangers of excessive public debt, but excessive private debt has received less attention.

This column documents a common form of indirect private sector bailout that goes largely unnoticed. Whenever households and firms are caught in a debt overhang and need to deleverage, governments come to the rescue through a countercyclical rise in public debt. This indirect substitution takes place even in the absence of a crisis.

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