Is There a Debt Service Channel of Monetary Transmission?

15 Pages Posted: 11 Dec 2017

See all articles by Boris Hofmann

Boris Hofmann

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

Gert Peersman

Ghent University - Department of Financial Economics

Date Written: December 3, 2017

Abstract

Previous research has explored the impact of private sector debt service ratios (DSRs), ie debt payments relative to income, on medium-term macroeconomic outcomes. This special feature, based on a study of 18 economies, finds that monetary policy shocks, in turn, have a significant impact on DSRs. We show that a monetary tightening leads to a significant and persistent increase in DSRs, with higher effective lending rates on the stock of debt outweighing a decline in the debt-to-income ratio. Moreover, the impact of monetary policy shocks on DSRs, as well as on economic activity, the price level, house prices and credit, turns out to be significantly larger in high-debt economies. These findings point to the existence of a debt service channel of monetary transmission.

JEL Classification: E52

Suggested Citation

Hofmann, Boris and Peersman, Gert, Is There a Debt Service Channel of Monetary Transmission? (December 3, 2017). BIS Quarterly Review, December 2017, Available at SSRN: https://ssrn.com/abstract=3082597

Boris Hofmann (Contact Author)

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Gert Peersman

Ghent University - Department of Financial Economics ( email )

W. Wilsonplein 5D
Ghent, 9000
Belgium
+3292643514 (Phone)

HOME PAGE: www.feb.ugent.be/fineco/gert.html

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