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Accounting for debt service: the painful legacy of credit booms

Mathias Drehmann (), John Juselius and Anton Korinek

No 645, BIS Working Papers from Bank for International Settlements

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 long-lasting adverse real effects.

Keywords: new borrowing; debt service; financial cycle; real-financial linkages (search for similar items in EconPapers)
JEL-codes: E17 E44 G01 D14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2017-06
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