Template-Type: ReDIF-Paper 1.0
Author-Name: Mathias Drehmann
Author-X-Name-First: Mathias
Author-X-Name-Last: Drehmann
Author-Name: Mikael Juselius
Author-X-Name-First: Mikael
Author-X-Name-Last: Juselius
Author-Name: Anton Korinek
Author-X-Name-First: Anton
Author-X-Name-Last: Korinek
Title: Long-term debt propagation and real reversals
Abstract: We examine a propagation mechanism that arises from households' long-term borrowing and show that it accounts for real reversals after credit booms. An impulse to new borrowing boosts output in the short run, but long-term debt generates a predictable hump-shaped path of debt service that depresses output far into the future. We confirm these patterns empirically using a novel multi-country dataset of debt flows. We embed long-term debt propagation in a New Keynesian model and show how credit shocks generate predictable reversals that are difficult for policymakers to counteract.
Creation-Date: 2023-05
File-URL: https://www.bis.org/publ/work1098.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1098.htm
File-Format: text/html
Number: 1098
Keywords: new borrowing, debt service, financial cycle, financial flows and real effects
Classification-JEL: E17, E44, G01, D14
Handle: RePEc:bis:biswps:1098