The Inaugural BCAM Policy Talk: “Fiscal Buffers, Private Debt and Stagnation: The Good, the Bad and the Ugly” by Giovanni Melina

This post was written by Veronika Akhmadieva,  an MPhil/Phd Economics student at Birkbeck

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In 2015, global debt hit a record high of $152 trillion (225% of world GDP), raising the possibility of a new global financial crisis striking the economy in the near future. That prompted the International Monetary Fund (IMF) to conduct an in-depth analysis of global debt and economic growth. The results of this research formed the basis of the inaugural BCAM (Birkbeck Centre for Applied Macroeconomics) policy talk at Birkbeck, given by Dr Giovanni Melina (IMF).

Dr Melina presented an academic paper, a result of his joint work with Nicoletta Batini (IMF) and Stefanie Villa (KU Leuven), that focuses on fiscal buffers, debt and stagnation, and has strong policy implications. In the period from 2002 to 2008, the bulk of the increase in debt of large advanced economies was due to borrowing by the private sector. Then, as some might recall, the Great Recession happened, and the picture changed dramatically; the increase in private debt was rather modest while government debt increased drastically.

A curious mind might wonder why government debt went up during the financial crisis 2007-2008. Dr Melina proposed two possible reasons. The first explanation is based on the denominator effect and on the mechanism of government automatic stabilisers. Government spending, in nominal terms, increased during the financial crisis, partially because more people applied for unemployment benefits, and this in turn boosted government debt. The second explanation derives from the fact that many governments attempted to cover part of private debt – through the recapitalisation of banks, for instance – and that led to the fall in government revenues and the rise in public debt.


The deleveraging is a well-known concept in economics that refers to the process of economic entities reducing their debt to income ratio. The deleveraging of the economy often follows global economic catastrophes, and the financial crisis of 2007-2008 was no exception. Deleveraging can yield important real effects in the economy. Advanced economies can resort to public debt to a very large extent in order to cushion the effects of the negative shocks. For emerging markets raising government debt can be tricky. In some of them deleveraging is still to take place. So what are the best ways for governments to tackle potential deleveraging?

Dr Melina might just have the answer. But first two preliminary questions must be considered – do the levels of private and public debt have tangible effects on output growth? And should government extend financial assistance to credit-constrained agents and firms at times of financial distress?

The paper addresses these questions by first revisiting the literature on the effects of public and private debt on economic growth. Then the authors build a theoretical framework that reproduces the leverage cycle. The authors examine links between private and public debt, in order to capture the mechanisms through which private debt may become public. Finally, the model is used to analyse the effects of government interventions targeted towards financially constrained agents.

Private debt proved to have a negative effect on output. As for public debt, when authors differentiated between high (greater than 95% of GDP) and low public debt countries, they found that when the public debt is low, the government has more room for manoeuvre (more fiscal buffers) and can help to support economic activities in the deleveraging phase. However, if the level of public debt is high to begin with, the further increase is detrimental to the economic growth.

On the question of government financial assistance to credit-constrained agents, it appears that intervention mitigates the extent of the deleveraging and reduces the deflationary effect of the negative house price shocks. Another somewhat counterintuitive finding is that the peak increase in government debt is decreased by government intervention; if government intervenes, it sustains the economic activity and by doing so it reduces its debt. If the level of inefficiency of government spending is high or the level of intervention is excessive, the above may not be true. According to Dr Melina – with about 10% inefficiency costs, the optimal size of intervention is about 7-8% of GDP.

Targeted Intervention

One step further, the authors compare the policy of targeted intervention with other types of fiscal stimuli, such as government investment and government consumption. They found that targeted intervention is more effective in the deleveraging phase, as it is aimed at financially constrained individuals that have high marginal propensity to consume. Hence, most of the funds that are channelled towards these individuals are consumed and that translates into a stronger output effect. Some economies, such as Southern European countries, have limited fiscal space to begin with and can only intervene to a very small extent. These countries may benefit from using limited government funds for targeted intervention rather than increasing the general level of government spending, which might be a less efficient option.

Targeted intervention works best if adequately planned and complemented by appropriate monetary and fiscal policies. In addition, it can be direct, meaning targeted at firms and private sector, or indirect, through banks, recapitalization, asset purchases and guarantees. When banks are in distress, direct targeted intervention might be preferable, because banks may use the funds provided by the government to repair their balance sheets, instead of increasing lending to the private sector.

In practice, targeted intervention might not be the easiest task for governments, as they have to find a way to discriminate between agents, to provide funds to specific firms or industries. Targeted intervention naturally raises moral hazards and competition issues, too. Dr Melina emphasised that targeted intervention is not something to be practised by the government on a regular basis, but should be reserved for disastrous times, when the economy is in distress and in urgent need of stabilisation policies. Could it be that now is just the right time?

Further information:

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UpScale visits 10 Downing Street

This post was contributed by Kate Dodgson, UpScale’s Employability Project Manager

Kate Dodgson (right) at networking event at 10 Downing Street

Kate Dodgson (right) at networking event at 10 Downing Street

On 24 November 2016, UpScale went to 10 Downing Street to attend a Women in Tech Networking and Mentoring event. The event was on the invitation of Rt. Hon Karen Bradley MP – the Secretary of State for Culture, Media and Sport and was organised by one of UpScale’s partners – DevelopHer – a non-profit organisation elevating women in tech.

100 women in tech were invited to attend and were divided into mentors and mentees. I was invited to represent Birkbeck as a mentor. Birkbeck’s UpScale programme aims to encourage Birkbeck students to pursue work in technology and has a strong focus on under-represented groups including women in technology. Partnerships with organisations such as DevelopHer support UpScale to achieve this important aim.

While nibbling on cucumber sandwiches and sipping elderflower cordial, the fifty mentors began networking with the fifty mentees. Roughly ten minutes were allocated to each conversation before a gavel was hit and the women rotated. Ideas, business cards and laughs were exchanged, and there were women representatives from the public sector, higher education, the private sector (ranging from huge multi-national companies to brand new start-ups) and everything in-between.

The Rt. Hon Karen Bradley arrived and gave a speech highlighting the gender gap in STEM industries and emphasising the need to close the gap. She said that the event was designed to allow prominent women in tech to get their heads together to try and find ways to combat the inequality. She invited the women attending to suggest to her ways that the government could address the under-representation of women.

downing-st-4The evening ended with a hundred selfies by the front door of No.10 and a walk to a nearby pub. Here the networking continued, and the wine drinking commenced. Ideas on how to lessen the gap and make technology a sector of choice, for all women, continued and relationships were built and no doubt will continue to be nurtured in the coming weeks and months.

Birkbeck’s UpScale programme helps promote women in tech by exposing female students to the tech industry and offering ideas and thoughts, directly from industry on how to support them to enter it. Through partnering with numerous companies and organisations, UpScale provides students with a series of co-curricular events which improve their digital and soft skills. Providing female students with these skills gives them greater confidence to enter a currently male-dominated industry and over time will reduce the gender imbalance.

UpScale is delighted to have been invited to No. 10 to act as a mentor for women in tech and looks forward to continuing the incredible work being done to boost women’s prospects in this substantial industry.

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