By Jennifer Smith and Gabriel Sterne of the Bank’s Economics Division, and Michael Devereux.
This article examines the influence of debt on the behaviour of households and firms in the recent recession. It compares the levels of debt in the two sectors in recent years, and the sectors’ reactions to indebtedness. It then considers each sector in turn. Debt was more unevenly spread across both households and firms in the recent recession than in its predecessors. Partly as a result, disaggregated data can in both cases help in reaching a more accurate picture of the influence of debt on behaviour, and in deciding between competing explanations of recent developments in the two sectors.