Page "Aggregate demand" Paragraph 39

0. 1 % of GDP, which is statistical noise.

Conversely, if the debt level is 300 % of GDP and 1 % of loans are not repaid, this impacts GDP by 1 % of 300 % = 3 % of GDP, which is significant: a change of this magnitude will generally cause a recession.

Similarly, changes in the repayment rate ( debtors paying down their debts ) impact aggregate demand in proportion to the level of debt.

Thus, as the level of debt in an economy grows, the economy becomes more sensitive to debt dynamics, and credit bubbles are of macroeconomic concern.

Since write-offs and savings rates both spike in recessions, both of which result in shrinkage of credit, the resulting drop in aggregate demand can worsen and perpetuate the recession in a vicious cycle.