If companies have taken on rising amounts of debt in the past, this did not affect the long-term stability of an economy. This is shown by a recent paper by Moritz Schularick, professor at ECONtribute at the University of Bonn. The researcher has examined the consequences of rising corporate debt using long-run cross country data.
The increase in corporate debt in many countries, both before and during the Corona pandemic, often raises the concern that the debt buildup could lead to a macroeconomic burden. Therefore, the researcher analyzed whether the increase in corporate debt slows the recovery from the pandemic.
The results do not raise alarm bells: A look at the past shows that the macroeconomic consequences of a boom in corporate debt are typically benign. However, there are three caveats to keep in mind. Among them is the sectoral composition of corporate debt and the institutional framework for debt reorganization. Based on these findings, the economist advises creating frameworks for efficient debt reorganization and urges strict supervision of the banking system.
The paper is part of the 2021 Forum on Central Banking of the European Central Bank.