Boston Fed’s 65th Economic Research Conference examines impact of rising U.S. debt levels Boston Fed’s 65th Economic Research Conference examines impact of rising U.S. debt levels

Economists, central bankers analyze the causes and risks of high leverage Economists, central bankers analyze the causes and risks of high leverage

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November 18, 2021

Economists and central bankers gathered virtually last week for the Federal Reserve Bank of Boston’s 65th annual economic conference to discuss whether rising debt levels threaten the financial stability of the United States.

The three-day conference, titled “The Implications of High Leverage for Financial Instability Risk, Real Economic Activity, and Appropriate Policy Responses,” took place Nov. 8-10. The event included talks about the effects of COVID-19 on public debt and the job market, as well as presentations of findings on corporate and household debt after the Great Recession. Economists and central bankers also participated in two policy-related panels on the final day of the conference.

Boston Fed Interim President and CEO Ken Montgomery highlighted the risks of rising leverage in nonfinancial business sectors during his opening remarks.

“By some measures, nonfinancial business leverage is historically high – perhaps due, in part, to extremely low interest rates globally,” he said. “Our conference aims to analyze the risks of such high leverage for the broader economy – and also provide a forum for discussion of appropriate policy responses targeted at mitigating those risks.”

Papers shared during the conference

Researchers presented five papers during the first two days of the conference on topics ranging from high leverage in the public and the nonfinancial business sectors to homeownership and commercial real estate. The conference papers and video recordings of each session are available on the conference website.

  • “Leverage and the Macroeconomy,” Efraim Benmelech, Kellogg School of Management at Northwestern University
  • “Evolution of Debt Financing toward Less Regulated Financial Intermediaries,” Isil Erel, Fisher College of Business at Ohio State University
  • “Does High Leverage Render Businesses Vulnerable to the COVID-19 Shock?” Falk Bräuning, José Fillat, and Christina Wang, Boston Fed
  • “Household Leverage before and after the Great Recession? Time Series versus Cross-Sectional Evidence,” Manuel Adelino, Fuqua School of Business at Duke University, and Antoinette Schoar, Massachusetts Institute of Technology Sloan School of Management
  • “Collateral Reallocation in Commercial Real Estate in the Shadow of COVID-19,” Lara Loewenstein, Federal Reserve Bank of Cleveland, Timothy Riddiough, Wisconsin School of Business at the University of Wisconsin-Madison, and Paul Willen, Boston Fed

Monetary policy in the “new normal” of COVID-19

The conference’s first panel, “Implications of a New Normal Environment Characterized by Low Interest Rates and a Changed Monetary Policy Reaction Function,” looked at the intersection of monetary policy and financial stability. Panelists focused on the challenges the Fed faces in coming years overcoming the significant disruptions brought on by the COVID-19 pandemic and achieving the dual mandate – maximum sustainable employment and stable prices.

Raghuram Rajan, a former governor of the Reserve Bank of India and a professor of finance at the University of Chicago Booth School of Business, gave a broad overview of the pandemic’s impact on the current economic environment and said central banks should proceed with caution.

“Central banks have a very, very difficult task at this point,” Rajan said. “It does require reacting to the inflationary environment, but in a measured way so that they don’t precipitate a much stronger downturn.”

Ricardo Reis, an economics professor at the London School of Economics and Political Science, examined the rise in public leverage – government and central bank consolidated leverage – since the start of the pandemic and highlighted it as a possible source of financial stability over the next few years.

Jeremy Stein, a former member of the Federal Reserve Board of Governors and an economics professor at Harvard University, spoke about concerns and uncertainty related to sustained inflation going forward.

“That uncertainty, I think, is really the central challenge for monetary policy at the moment,” he said.

Research Publications

New England Economic Indicators, Current Policy Perspectives, Research Reports, Policy Reports, and Working Papers

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Tools for tackling high leverage

In the final panel, “The Toolkit of Policies in the Brave New World of Debt,” economists and central bankers discussed potential tactics for addressing high leverage.

Kristin Forbes, a professor of management and global economics at MIT, said policymakers should be cautious about high debt, and they must think carefully about which policies to implement. She also described how the expansion of central banks’ toolkits over the last decade has given policymakers new opportunities to better target the risks associated with leverage and debt.

“It’s really an exciting period of innovation,” Forbes said. “Central banking is now about much more than just raising and lowering interest rates.”

Luc Laeven, director-general of the Directorate General Research of the European Central Bank, spoke about potential disconnects between risks associated with high corporate leverage in certain sectors and existing “macroprudential” policies, or policies aimed at ensuring the stability of the financial system.

“As long as macroprudential policies are imperfect, there is this uneasiness that monetary policy will have to acknowledge that and take that into account, unlike most of our textbook models,” he said.

Klaas Knot, president of Dutch central bank De Nederlandsche Bank and vice-chair of the Financial Stability Board, described some takeaways from the bank’s work to mitigate high leverage in the Netherlands. He noted that central bankers’ tools are primarily confined to addressing risks in the banking sector, and that the tools for mitigating risk for households or corporations are limited.

Recently, the Dutch central bank adjusted risk weights for mortgages to more accurately reflect the level of systematic risk in the housing market, with the goal of improving banks’ resilience against a significant drop in housing prices, Knot said. The bank also introduced a new framework to better respond to cyclical economic shocks, he added.

Recordings of both panels are available at the conference website.

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