There is now a rich body of evidence that rapid build-ups in mortgage debt increase GDP-at-risk by making downturns both deeper and longer. This relationship is robust across different countries, and across time (Chart 11).19  17 The two tools were calibrated to be broadly consistent with one another. 18  Factors relevant for the calibration of the affordability test (and, by extension, the LTI flow limit given the consistency of calibration between the two) were discussed in the FPC’s 2019 housing review (see December 2019 Financial Stability Report). 19 See, for example, Bridges, J, Jackson, C, and McGregor, D, (2017) ‘Down in the slumps: the role of credit in five decades of recessions’, Bank of England Staff Working Paper No. 659 for cross-country evidence; Mian, A, and Sufi, A (2010), “Household leverage and the recession of 2007 to 2009”, IMF Economic Review 58, pp74-117; Kovacs, A, Rostom, M, and Bunn, P (2018), “Consumption response to aggregate demand shocks and the role of leverage”, Centre for Macroeconomics Discussion Paper 1820, for UK cohort evidence; and Baker, S, (2018), “Debt and the response to household income shocks: validation and application to linked financial account data”, Journal of Political Economy 126(4), pp1504-1557 for US household-level evidence. 19  All speeches are available online at www.bankofengland.co.uk/news/speeches  19  Chart 11: Relationship between household debt and downturns robust across countries and time  Source: Aikman, D, Bridges, J, Kashyap, A, and Siegert, C (2019), “Would macroprudential regulation have prevented the last crisis?”, Journal of Economic Perspectives, Winter.

These generally carry a higher yield than the assets purchased in the course of the intervention, typically low-yielding U.S. Treasuries. The difference in yields results in a net fiscal cost. 4  BIS central bankers’ speeches  Second, the need for U.S. fiscal consolidation implies that there will have to be offsetting increases in investment and the U.S. trade balance as the recovery proceeds. To illustrate this second point consider the following accounting identity: The public sector balance + the private sector balance = the current account balance Right now the identity holds as roughly: –10 percent of GDP public sector balance + 7 percent of GDP private sector balance = –3 percent of GDP current account balance.5 If the public sector balance must over time move from around –10 percent to around –3 percent to stabilize the federal debt-to-GDP ratio at tolerable levels, then the private sector balance and the current account balance must move by roughly 7 percentage points of GDP to take up the slack. Assuming that the consumption share of GDP still needs to fall over the medium term, the adjustment in the U.S. private balance will have to occur primarily in terms of rising residential or business fixed investment. There does seem to be room for business investment to expand significantly when firms become more confident in the economic outlook, provided that the United States remains a competitive location for investment. But residential investment is unlikely to climb very much for some time given the chronic overhang of unsold homes.