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Is there a debt service channel of monetary transmission?

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  • Boris Hofmann
  • Gert Peersman

Abstract

Previous research has explored the impact of private sector debt service ratios (DSRs), ie debt payments relative to income, on medium-term macroeconomic outcomes. This special feature, based on a study of 18 economies, finds that monetary policy shocks, in turn, have a significant impact on DSRs. We show that a monetary tightening leads to a significant and persistent increase in DSRs, with higher effective lending rates on the stock of debt outweighing a decline in the debt-to-income ratio. Moreover, the impact of monetary policy shocks on DSRs, as well as on economic activity, the price level, house prices and credit, turns out to be significantly larger in high-debt economies. These findings point to the existence of a debt service channel of monetary transmission.

Suggested Citation

  • Boris Hofmann & Gert Peersman, 2017. "Is there a debt service channel of monetary transmission?," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:1712e
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    3. Cyril Couaillier & Valerio Scalone, 2020. "How does Financial Vulnerability amplify Housing and Credit Shocks?," Working papers 763, Banque de France.
    4. Tzamourani, Panagiota, 2021. "The interest rate exposure of euro area households," European Economic Review, Elsevier, vol. 132(C).
    5. Ahmed, Rashad & Borio, Claudio & Disyatat, Piti & Hofmann, Boris, 2024. "Losing traction? The real effects of monetary policy when interest rates are low," Journal of International Money and Finance, Elsevier, vol. 141(C).
    6. Hodula Martin & Pfeifer Lukáš, 2018. "Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment," Review of Economic Perspectives, Sciendo, vol. 18(3), pages 195-224, September.
    7. Giacomo Rella, 2021. "The Fed, housing and household debt over time," Department of Economics University of Siena 850, Department of Economics, University of Siena.
    8. Mario Lupoli, 2022. "Deleverage and Defaults in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-58, December.
    9. Kelly, Jane & Mazza, Elena, 2019. "Mortgage servicing burdens and LTI caps," Financial Stability Notes 13/FS/19, Central Bank of Ireland.
    10. J. Boeckx & M. de Sola Perea & M. Deroose & G. de Walque & Th. Lejeune & Ch. Van Nieuwenhuyse, 2018. "What will happen when interest rates go up?," Economic Review, National Bank of Belgium, issue iii, pages 35-56, september.
    11. Frederic Boissay & Claudio Borio & Cristina Leonte & Ilhyock Shim, 2023. "Prudential policy and financial dominance: exploring the link," BIS Quarterly Review, Bank for International Settlements, March.
    12. Anna Zabai, 2017. "Household debt: recent developments and challenges," BIS Quarterly Review, Bank for International Settlements, December.
    13. Aaron Mehrotra & Jochen Schanz, 2020. "Financial market development and monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial market development, monetary policy and financial stability in emerging market economies, volume 113, pages 1-18, Bank for International Settlements.
    14. Michael Chui & Anamaria Illes & Christian Upper, 2018. "Mortgages, developers and property prices," BIS Quarterly Review, Bank for International Settlements, March.

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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