House of Debt Jubilee: Iceland After the 2008 Financial Crisis

• Main Author: Gao, Tiger
• Other Authors: Mian, Atif
• Format: Bachelor Thesis
• Language: English
• Published: 2021
• Subjects: Iceland
• Online Access: http://arks.princeton.edu/ark:/88435/dsp01dj52w778z

Large-scale debt write-downs are understood as helpful for economies to recover more quickly from financial shocks, but very few have been implemented in practice. Iceland was particularly hard hit by the 2008 financial crisis due to its high banking sector concentration and dramatic pre-crisis credit boom. In response, Iceland implemented a generous debt jubilee in 2011 amounting to over 10% of its GDP. I use synthetic controls method (SCM) to investigate the impact of this program. I find it to result in substantial improvements for macroeconomic and financial conditions. Within 5 years of the policy treatment, Iceland's unemployment rate, non-performing loan ratio, private credit to GDP ratio, and international debt to GDP ratio were each reduced by around 2, 15, 50, and 200 more percentage points than what they would have been in the absence of the debt jubilee. I demonstrate the significance of my estimates through a variety of inferential methods and robustness checks, such as placebo studies, the cross-validation technique, and synthetic difference-in-differences (SDID).