Long-term debt propagation and real reversals

Mathias Drehmann, Mikael Juselius and Anton Korinek

No 18075, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine a propagation mechanism that arises from households' long-term borrowing and show that it accounts for real reversals after credit booms. An impulse to new borrowing boosts output in the short run, but long-term debt generates a predictable hump-shaped path of debt service that depresses output far into the future. We confirm these patterns empirically using a novel multi-country dataset of debt flows. We embed long-term debt propagation in a New Keynesian model and show how credit shocks generate predictable reversals that are difficult for policymakers to counteract.

Keywords: new borrowing; debt service; Financial cycle; Financial flows and real effects (search for similar items in EconPapers)
JEL-codes: D14 E17 E44 G01 (search for similar items in EconPapers)
Date: 2023-04
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Working Paper: Long-term debt propagation and real reversals (2023)
Working Paper: Long-term debt propagation and real reversals (2023)
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