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Sustainable Financial Obligations and Crisis Cycles

Author

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  • Mikael Juselius

    (Monetary Policy and Research Department, Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Disclaimer: the views presented here are the authors’ and do not necessarily represent those of the Bank of Finland.)

  • Moshe Kim

    (Department of Economics, University of Haifa, Mount Carmel, Haifa 31905, Israel)

Abstract

The ability to distinguish between sustainable and excessive debt developments is crucial for securing economic stability. By studying US private sector credit loss dynamics, we show that this distinction can be made based on a measure of the incipient aggregate liquidity constraint, the financial obligations ratio. Specifically, as this variable rises, the interaction between credit losses and the business cycle increases, albeit with different intensity depending on whether the problems originate in the household or the business sector. This occurs 1–2 years before each recession in the sample. Our results have implications for macroprudential policy and countercyclical capital-buffers.

Suggested Citation

  • Mikael Juselius & Moshe Kim, 2017. "Sustainable Financial Obligations and Crisis Cycles," Econometrics, MDPI, vol. 5(2), pages 1-23, June.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:2:p:27-:d:102204
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    2. Angel Huerga & Carlos Rodríguez-Monroy, 2019. "Mandatory Convertible Notes as a Sustainable Corporate Finance Instrument," Sustainability, MDPI, vol. 11(3), pages 1-26, February.

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