Project description DEENESFRITPL A closer look at the lingering impact of household debt In the wake of the 2007 banking crisis and the ensuing economic recession, the United States and Europe experienced a profound shock that left deep scars on their economies. The aftermath of financial crises is known to trigger more severe and enduring contractions in output and employment compared to non-financial recessions. The persistently puzzling question remains: Why are the effects of credit shocks so long-lasting? To find the answer, the ERC-funded PERSISTDEBT project will construct comprehensive datasets by merging information from various sources, including exhaustive credit information. This approach allows researchers to obtain causal evidence and precise quantification on the intricate interplay between debt, systemic risk, crises, and novel macroprudential policies. Show the project objective Hide the project objective Objective In 2007 the US and Europe were overwhelmed by a banking crisis, which was followed by a severe economic recession. Historical studies show that financial crises are followed by periods of substantially stronger contraction of aggregate output and employment than non-financial recessions. Those studies also point out that the best predictor of financial crises is an ex-ante strong credit boom which, after the beginning of the crisis, followed by negative overall credit growth. Lastly, financial crises take a long time until recovering the pre-crisis levels. Why are the effects of credit shocks so strong and persistent over time? Is this effect explained by costly household deleveraging? What is the effect of household debt on consumption, savings and employment? Are there any benefits of debt in crises? Do some effects of the financial crisis work through a reduction in credit supply to firms and projects with high innovative content and productivity (high overall return, but with high credit and liquidity risk for the lenders)? Or are the cleansing effects in financial crises concentrated on the less productive firms? Can macroprudential policies based on strict control of loan-to-value ratios stop the building up of excessive household debt? We plan to construct several new datasets to study these issues by merging information from different sources. For some issues, like the analysis of the effect of household debt on consumption and employment, we can take advantage of a natural experiment of randomized allocation of debt among individuals derived from the use of lotteries to allocate the rights to buy housing in Spain. In comparison to the existing literature, we can exploit the exogenous variation generated by these lotteries and some other combination of data (including exhaustive credit data) to obtain causal evidence and quantification on the interaction between debt, systemic risk, crises, and the new macroprudential policy. Fields of science social sciencespolitical sciencespolitical policiespublic policieshumanitieshistory and archaeologyhistorysocial scienceseconomics and businesseconomicsmonetary and financessocial scienceseconomics and businesseconomicsproduction economicsproductivitysocial scienceseconomics and businessbusiness and managementemployment Keywords Financial crises Systemic risk Credit Debt Balance sheet channel Macroprudential policy Innovation Debt overhang Loan evergreening Excessive risk-taking Conflicts of interest Banking Programme(s) H2020-EU.1.1. - EXCELLENT SCIENCE - European Research Council (ERC) Main Programme Topic(s) ERC-CoG-2014 - ERC Consolidator Grant Call for proposal ERC-2014-CoG See other projects for this call Funding Scheme ERC-COG - Consolidator Grant Host institution UNIVERSIDAD POMPEU FABRA Net EU contribution € 1 208 676,00 Address PLACA DE LA MERCE, 10-12 08002 Barcelona Spain See on map Region Este Cataluña Barcelona Activity type Higher or Secondary Education Establishments Links Contact the organisation Opens in new window Website Opens in new window Participation in EU R&I programmes Opens in new window HORIZON collaboration network Opens in new window Total cost € 1 208 676,00 Beneficiaries (2) Sort alphabetically Sort by Net EU contribution Expand all Collapse all UNIVERSIDAD POMPEU FABRA Spain Net EU contribution € 1 208 676,00 Address PLACA DE LA MERCE, 10-12 08002 Barcelona See on map Region Este Cataluña Barcelona Activity type Higher or Secondary Education Establishments Links Contact the organisation Opens in new window Website Opens in new window Participation in EU R&I programmes Opens in new window HORIZON collaboration network Opens in new window Total cost € 1 208 676,00 KOBENHAVNS UNIVERSITET Denmark Net EU contribution € 100 000,00 Address NORREGADE 10 1165 Kobenhavn See on map Region Danmark Hovedstaden Byen København Activity type Higher or Secondary Education Establishments Links Contact the organisation Opens in new window Website Opens in new window Participation in EU R&I programmes Opens in new window HORIZON collaboration network Opens in new window Total cost € 100 000,00
