Aggregate debt servicing and the limit on private credit

Mathias Drehmann, Mikael Juselius and Sarah Quincy

No 1235, BIS Working Papers from Bank for International Settlements

Abstract: This paper reviews the debt service ratio (DSR) as a theoretically well-grounded indicator of systemic risk. The DSR has the desirable feature that it fluctuates around a stable level which makes its early warning signals easy to understand and communicate. In contrast, current early warning indicators (EWIs) based on credit-developments lack clear economic interpretations and require statistical detrending, which can reduce their accuracy and usefulness for macroprudential policymakers. The review of the literature shows that the DSR provides highly accurate early warning signals for crises and future economic slowdowns, outperforming traditional credit-based indicators. By extending the measurement of the DSR back to the 1920s – a novel contribution in this paper – we demonstrate its EWI effectiveness across different historical periods and show that the DSR acts as an upper limit on benign financial deepening. The paper also outlines questions for future research.

Keywords: macroprudential policy; early warning indicators; financial crises; debt service ratio; financial deepening; economic history (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 N20 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-his
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