Do Debt Service Costs Affect Macroeconomic and Financial Stability?

15 Pages Posted: 24 Jan 2013

See all articles by Mathias Drehmann

Mathias Drehmann

Bank for International Settlements (BIS)

Mikael Juselius

Bank for International Settlements (BIS) - Monetary and Economic Department; Hanken School of Economics - Department of Economics; University of Helsinki - Department of Political and Economic Studies

Date Written: September 1, 2012

Abstract

Excessive private sector debt can undermine economic stability. In this special feature, we propose the debt service ratio (DSR) as a measure of the financial constraints imposed by private sector indebtedness, and investigate its association with recessions and financial crises. We find that the DSR prior to economic slumps is related to the size of the subsequent output losses. Moreover, the DSR provides a very accurate early warning signal of impending systemic banking crises at horizons of up to one to two years in advance. We conclude that the DSR can serve as a useful supplementary indicator for the build-up of vulnerabilities in the real economy and financial sector.

JEL Classification: E37, E44, G01, G21

Suggested Citation

Drehmann, Mathias and Juselius, Mikael, Do Debt Service Costs Affect Macroeconomic and Financial Stability? (September 1, 2012). BIS Quarterly Review September 2012, Available at SSRN: https://ssrn.com/abstract=2206301

Mathias Drehmann (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Mikael Juselius

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Hanken School of Economics - Department of Economics ( email )

PO Box 479
FI-00101 Helsinki
Finland

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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