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Leverage dynamics and the real burden of debt

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  • Mikael Juselius
  • Mathias Drehmann

Abstract

In addition to leverage, the aggregate debt service burden is an important link between financial and real developments. Using US data from 1985 to 2013, we find that it has sizable negative effects on credit and expenditure growth. Strong interactions between leverage and the debt service burden lead to large and protracted cycles in credit and expenditure that match the stylised facts of credit booms and busts. Even with real-time estimates, the predicted adjustment to leverage and the debt service burden from 2005 onwards imply paths for credit and expenditure that closely match actual developments before and during the Great Recession.

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  • Mikael Juselius & Mathias Drehmann, 2015. "Leverage dynamics and the real burden of debt," BIS Working Papers 501, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:501
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    Keywords

    business cycle; credit boom; leverage; debt service burden; financial-real interactions; financial stability;
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