Leverage Dynamics and the Burden of Debt

42 Pages Posted: 6 Apr 2016

See all articles by Mikael Juselius

Mikael Juselius

Bank of Finland

Mathias Drehmann

Bank for International Settlements (BIS)

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Date Written: 2016

Abstract

In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2013, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, such as the lack of above-trend output growth during credit booms and the depth and length of ensuing recessions, without appealing to large shocks or non-linearities. Using data up to 2005, our model predicts paths for credit and expenditure that closely match actual developments before and during the Great Recession.

Keywords: E20, E32, E44, G01, business cycle, credit boom, leverage, debt service burden, financial-real interactions, financial stability

Suggested Citation

Juselius, Mikael and Drehmann, Mathias, Leverage Dynamics and the Burden of Debt (2016). Bank of Finland Research Discussion Paper No. 3/2016, Available at SSRN: https://ssrn.com/abstract=2759779

Mikael Juselius (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Mathias Drehmann

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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