Sectoral Indebtedness and Its Influence on Output of the Czech Economy

Abstract

This chapter examines the impact of sectoral indebtedness on GDP in Czechia, initially a low-indebted small open economy in which debt dynamics are becoming a major concern. The impact of household debt, non-financial corporation debt and public debt is analysed with the use of local projections based on instrumental variable estimations. The results show a more pronounced influence of household debt compared to non-financial corporation and government debt. Initially, increasing household debt stimulates short-run economic activity, but in the medium run, it limits household consumption and negatively affects output. This negative impact gradually turns into a positive effect in the long run. Non-financial corporation debt has a negative short- to medium-run impact but can have a small positive effect in the long run due to the prevalence of tradable industries. Public debt initially has a short-run negative impact, but then gradually becomes positive. Overall, the findings have implications for macroeconomic policies and the importance of monitoring financial stability.

Citation

Issever Grochová, L. and Škára, M. (2024), "Sectoral Indebtedness and Its Influence on Output of the Czech Economy", Stavárek, D. and Tvrdoň, M. (Ed.) Modeling Economic Growth in Contemporary Czechia (Entrepreneurship and Global Economic Growth), Emerald Publishing Limited, Leeds, pp. 231-250. https://doi.org/10.1108/978-1-83753-840-920241015