Ending over-lending: Assessing systemic risk with debt to cash flow
AbstractThis paper operationalizes early theoretical contributions of Hyman Minsky and applies these in the context of economic sectors and nations. Following the view of boom-bust asset cycles, depicted by the endogenous build-up of risks and their abrupt unraveling, Minsky highlighted the relationship between debt obligations and cash flows. While leverage is oftentimes linked to the vulnerability of a nation, and hence systemic risk, one less explored measure of leverage is the debt-to-cash flow ratio (Debt/CF). Cash flows certainly have a well-known, academically verified connection to the ability of corporations to service and repay corporate debt. This paper investigates whether the relationship between the flow of a nation's savings to its stock of total debt provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic Debt/CF trends, as well as apply the same procedure to individual economic sectors. This assessment of systemic risk is arranged for presentation within a four-zone framework. In terms of an early-warning indicator, we show that the Debt/CF ratio effectively stratifies systemic risks, and offers a useful platform toward macro-financial sustainability.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 11/2014.
Length: 26 pages
Date of creation: 03 Apr 2014
Date of revision:
debt-to-cash flow; debt-to-gross saving; systemic risk; four-zone framework;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G01 - Financial Economics - - General - - - Financial Crises
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-18 (All new papers)
- NEP-MAC-2014-04-18 (Macroeconomics)
- NEP-RMG-2014-04-18 (Risk Management)
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