Leaning Against the Credit Cycle

Paolo Gelain, Kevin Lansing and Gisle Natvik

No 2015/04, Working Paper from Norges Bank

Abstract: We study the interaction between monetary policy and household debt dynamics. To this end, we develop a dynamic stochastic general equilibrium model where household debt is amortized gradually, and only new loans are constrained by the current value of collateral. Long-term debt implies that swings in leverage do not simply reect shifts in borrowing, and brings model implied debt dynamics closer to their empirical counterparts. The model implies that contractive monetary policy has muted inuence on household debt, increasing debt-to-GDP in the short run, while reducing it only in the medium run. If the interest rate is systematically raised whenever the debt-to-GDP ratio or the real debt level is high, equilibrium indeterminacy and greater volatility of debt itself follows. Responding to debt growth does not cast this destabilizing influence.

Keywords: Monetary policy; Credit; Long-term debt. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-02-27
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (20)

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http://www.norges-bank.no/en/Published/Papers/Working-Papers/2015/42015/

Related works:
Journal Article: Leaning Against the Credit Cycle (2018)
Working Paper: Leaning Against the Credit Cycle (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2015_04

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