Leaning Against the Credit Cycle

36 Pages Posted: 4 May 2015

See all articles by Paolo Gelain

Paolo Gelain

Norges Bank

Kevin J. Lansing

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Gisle James James Natvik

BI Norwegian Business School - Department of Economics

Date Written: April 1, 2015

Abstract

We study the interaction between monetary policy and household debt dynamics. To this end, we develop a dynamic stochastic general equilibrium model where household debt is amortized gradually, and only new loans are constrained by the current value of collateral. Long-term debt implies that swings in leverage do not simply reflect shifts in borrowing, and brings modelimplied debt dynamics closer to their empirical counterparts. The model implies that contractive monetary policy has muted influence on household debt, increasing debt-to-GDP in the short run, while reducing it only in the medium run. If the interest rate is systematically raised whenever the debt-to-GDP ratio or the real debt level is high, equilibrium indeterminacy and greater volatility of debt itself follows. Responding to debt growth does not cast this destabilizing influence.

Keywords: Monetary policy, credit, long-term debt.

JEL Classification: E52, E32, E44.

Suggested Citation

Gelain, Paolo and Lansing, Kevin J. and Natvik, Gisle James James, Leaning Against the Credit Cycle (April 1, 2015). Norges Bank Working Paper 4 | 2015, Available at SSRN: https://ssrn.com/abstract=2602471 or http://dx.doi.org/10.2139/ssrn.2602471

Paolo Gelain

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Kevin J. Lansing

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
PO Box 7702
San Francisco, CA 94105
United States
415-974-2393 (Phone)
415-977-4031 (Fax)

Gisle James James Natvik (Contact Author)

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

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