This policy note summarizes the main empirical findings on the role of debt in financial crisis. Credit booms – on mortgage debt, debt to the non-tradable sector, asset price bubbles fueled by credit, and public debt booms – are often followed by economic underperformance and/or financial crisis. Costs of financial crisis – in terms of fiscal costs, output losses, and increase in non-performing loans – are larger than the costs of normal crisis and tend to be higher if the fiscal space is low. Public and private debt increase in the aftermath of global recessions and after reaching high levels tend to constitute a drag on GDP growth. Credit booms change the characteristics of the business cycle and tend to exhibit international synchronization.
