Do debt service costs affect macroeconomic and financial stability?
AbstractExcessive private sector debt can undermine economic stability. In this special feature, we propose the debt service ratio (DSR) as a measure of the financial constraints imposed by private sector indebtedness, and investigate its association with recessions and financial crises. We find that the DSR prior to economic slumps is related to the size of the subsequent output losses. Moreover, the DSR provides a very accurate early warning signal of impending systemic banking crises at horizons of up to one to two years in advance. We conclude that the DSR can serve as a useful supplementary indicator for the build-up of vulnerabilities in the real economy and financial sector.
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Bibliographic InfoArticle provided by Bank for International Settlements in its journal BIS Quarterly Review.
Volume (Year): (2012)
Issue (Month): (September)
Find related papers by JEL classification:
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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- Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48.
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- LainÃ , Patrizio & Nyholm, Juho & Sarlin, Peter, 2014. "Leading indicators of systemic banking crises: Finland in a panel of EU countries," Research Discussion Papers, Bank of Finland 14/2014, Bank of Finland.
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