NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises

Atif R. Mian, Amir Sufi, Francesco Trebbi

NBER Working Paper No. 17831
Issued in February 2012
NBER Program(s):   CF   EFG   POL

Debtors bear the brunt of a decline in asset prices associated with financial crises and policies aimed at partial debt relief may be warranted to boost growth in the midst of crises. Drawing on the US experience during the Great Recession of 2008-09 and historical evidence in a large panel of countries, we explore why the political system may fail to deliver such policies. We find that during the Great Recession creditors were able to use the political system more effectively to protect their interests through bailouts. More generally we show that politically countries become more polarized and fractionalized following financial crises. This results in legislative stalemate, making it less likely that crises lead to meaningful macroeconomic reforms.

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Document Object Identifier (DOI): 10.3386/w17831

Published: Atif Mian & Amir Sufi & Francesco Trebbi, 2014. "Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 1-28, April. citation courtesy of

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