The Implications of High Leverage for Financial Instability Risk, Real Economic Activity, and Appropriate Policy Responses

LEARNING AREA: Economic Development
Nov. 2021
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Nov 9, 9:30am

Nov 10, 9:30am


5 hours



The economy entered the COVID-19 crisis with an unprecedentedly high level of business leverage. Moreover, with interest rates expected to remain extremely low for several years to come, the indebtedness of businesses, households, and government is likely to increase further. These developments raise concerns among policymakers about the potential effects of a high, and potentially increasing, debt burden on financial stability and the real economy, both at the onset of a crisis and during the subsequent recovery phase.

This conference explores the various factors driving the rise in debt, as well as the risks to and potential impact on the financial system and the real economy as both cause and amplifier of adverse shocks. The conference also examines the implications of high leverage for policy responses to adverse shocks, as well as policy designs going forward that can curb the excessive buildup of debt.

The conference’s focus is on corporate leverage and household leverage, including leverage associated with real estate lending, both commercial and residential, which has played a major role in previous recessions and episodes of financial instability. Moreover, the continuing evolution of the US financial system may have increased the likelihood of excessive corporate leverage and the odds of such leverage becoming a source of financial instability. Thus, the conference also includes studies that delve into some of these structural changes and their financial stability implications, including the experience in financial markets and the real economy in the wake of the pandemic. Also explored is what the “new normal” environment characterized by persistently low interest rates will mean for businesses’ debt capacity and financial stability going forward, as well as for policies that have the potential to curb excessive leverage and mitigate adverse consequences of high leverage.

The Federal Reserve Bank of Boston Economic Research Conference Series fosters discussion and critical engagement among academics, central bankers, policymakers, and other experts on important economic policy topics.

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