Accounting for Debt Service: The Painful Legacy of Credit Booms

56 Pages Posted: 28 Jun 2017

See all articles by Mathias Drehmann

Mathias Drehmann

Bank for International Settlements (BIS)

Mikael Juselius

Bank of Finland

Anton Korinek

University of Virginia - Department of Economics and Darden School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 27, 2017

Abstract

When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have adverse long-lasting real effects.

Keywords: new borrowing, debt service, financial cycle, real-financial linkages

JEL Classification: E17, E44, G01, D14

Suggested Citation

Drehmann, Mathias and Juselius, Mikael and Korinek, Anton, Accounting for Debt Service: The Painful Legacy of Credit Booms (June 27, 2017). Bank of Finland Research Discussion Paper No. 12/2017, Available at SSRN: https://ssrn.com/abstract=2993859

Mathias Drehmann (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Mikael Juselius

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Anton Korinek

University of Virginia - Department of Economics and Darden School of Business ( email )

248 McCormick Rd
Charlottesville, VA 22904
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
73
Abstract Views
542
rank
294,794
PlumX Metrics