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Do debt service costs affect macroeconomic and financial stability?

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  • Mathias Drehmann
  • Mikael Juselius

Abstract

Excessive 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 Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2012)
Issue (Month): (September)
Pages:

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Handle: RePEc:bis:bisqtr:1209e

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Cited by:
  1. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, Elsevier, vol. 12(C), pages 3-15.
  2. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.
  3. Tony Wolken, 2013. "Measuring systemic risk: the role of macro-prudential indicators," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 76, pages 13-30, December.
  4. Drehmann, Mathias & Juselius, Mikael, 2014. "Evaluating early warning indicators of banking crises: Satisfying policy requirements," International Journal of Forecasting, Elsevier, Elsevier, vol. 30(3), pages 759-780.
  5. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48.
  6. Ashley Dunstan, 2014. "The interaction between monetary and macro-prudential policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 77, pages 15-25, June.
  7. Lainà, 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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