Leverage Dynamics and the Burden of Debt

18 Pages Posted: 2 Jun 2020

See all articles by Mikael Juselius

Mikael Juselius

Bank of Finland

Mathias Drehmann

Bank for International Settlements (BIS)

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Date Written: April 2020

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 2017, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, including the lack of above‐trend output growth during credit booms and the severity of ensuing recessions, without appealing to large shocks or nonlinearities. Estimating the model with data up to 2005, it predicts credit and expenditure paths that closely match actual developments before and during the Great Recession.

Suggested Citation

Juselius, Mikael and Drehmann, Mathias, Leverage Dynamics and the Burden of Debt (April 2020). Oxford Bulletin of Economics and Statistics, Vol. 82, Issue 2, pp. 347-364, 2020, Available at SSRN: https://ssrn.com/abstract=3615243 or http://dx.doi.org/10.1111/obes.12330

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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