Debt Overhang’s Effect on Business Investment and Economy

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Business expansion is dragging and slowing the economic recovery, and it seems everyone is searching for reasons.

Business expansion is dragging and slowing the economic recovery, and it seems everyone is searching for reasons.

Federal Reserve Bank of Cleveland researcher Filippo Occhino says a contributing factor may be something called debt overhang.

Simply put, when companies have too much debt it discourages them and their investors from taking on projects because the debt consumes any profits the investors might make, even in situations when the investment raises equity in the company.

Click here to read Occhino’s Economic Commentary; watch a simplified explanation of the debt overhang effect in our latest Drawing Board video (really bad drawings, real simple explanations); or read a layman’s version of Occhino’s paper in Forefront, the Cleveland Fed’s policy publication.

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Anne M. DiTeodoro
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