Leverage Dynamics and the Real Burden of Debt

53 Pages Posted: 8 May 2015

See all articles by Mikael Juselius

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

Mathias Drehmann

Bank for International Settlements (BIS)

Date Written: May 2015

Abstract

In addition to leverage, the aggregate debt service burden is an important link between financial and real developments. Using US data from 1985 to 2013, we find that it has sizable negative effects on credit and expenditure growth. Strong interactions between leverage and the debt service burden lead to large and protracted cycles in credit and expenditure that match the stylised facts of credit booms and busts. Even with real-time estimates, the predicted adjustment to leverage and the debt service burden from 2005 onwards imply paths for credit and expenditure that closely match actual developments before and during the Great Recession.

Keywords: business cycle, credit boom, leverage, debt service burden, financial-real interactions, financial stability

JEL Classification: E20, E32, E44, G01

Suggested Citation

Juselius, Mikael and Drehmann, Mathias, Leverage Dynamics and the Real Burden of Debt (May 2015). BIS Working Paper No. 501, Available at SSRN: https://ssrn.com/abstract=2604099

Mikael Juselius (Contact Author)

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

Mathias Drehmann

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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