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Accounting for debt service : The painful legacy of credit booms

Listed author(s):
  • Drehmann, Mathias
  • Juselius, Mikael
  • Korinek, Anton

When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have adverse long-lasting real effects.

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File URL: https://helda.helsinki.fi/bof/bitstream/123456789/14751/1/BoF_DP_1712.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 12/2017.

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Date of creation: 27 Jun 2017
Handle: RePEc:bof:bofrdp:2017_012
Contact details of provider: Postal:
Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland

Web page: http://www.suomenpankki.fi/en/

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