Indebtedness, Deleveraging and Macroeconomic Stability

Abstract:

Until the onset of the 2008 global financial crisis, Denmark saw a substantial increase in leverage within the private sector of the economy. This leveraging trend was in line with most advanced economies at that time. Although Denmark is a net lender to the rest of the world, and is in fact performing relatively well in terms of macroeconomic and fiscal stability, sluggish growth is still being observed even six years after the 2008 crisis. Also, since gross debt accumulation within the household and corporate sectors of the economy has not been reduced to pre-crisis levels, there is evidence to suggest that Denmark is also subject to a credit cycle. This research project intends to study deleveraging and other policies aimed at eliminating debt overhang within highly leveraged private sectors, along with addressing an indebted public sector. Here, the analysis will be centered on how retained pension savings, the taxation regime, and financial regulation affect economic allocation of realized and unrealized wealth of households and corporations and how this impacts on economic growth and other key macroeconomic variables.