Hoesehold debt

Some studies suggest that many economies’ total gross debt levels are excessive and need to decline.1 For example, two influential reports by McKinsey (2010, 2012) emphasize that to “clear the way” for economic growth, advanced economies need to reverse the recent surge in total gross debt. Yet others suggest that the recent rise in debt is not necessarily a reason for concern. For example, Fatás (2012) argues that the McKinsey reports’ focus on gross debt is “very misleading,” since what matters for countries is net wealth and not gross debt.2 A high level of private sector debt as a share of the economy is also often interpreted as a sign of financial development, which in turn is beneficial for long-term growth (see, for example, Rajan and Zingales, 1998). Similarly, Krugman (2011) notes that because gross debt is “(mostly) money we owe to ourselves,” it is not immediately obvious why it should matter.


However, Krugman also cautions that gross debt can become a problem. Overall, there is no accepted wisdom about whether and how gross debt may restrain economic activity.


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