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Aggregate Debt Servicing and the Limit on Private Credit

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Listed:
  • Mathias Drehmann
  • Mikael Juselius
  • Sarah Quincy

Abstract

This paper reviews the debt service ratio (DSR) as a theoretically well-grounded indicator of systemic risk. The DSR has the desirable feature that it fluctuates around a stable level which makes its early warning signals easy to understand and communicate. In contrast, current early warning indicators (EWIs) based on credit-developments lack clear economic interpretations and require statistical detrending, which can reduce their accuracy and usefulness for macroprudential policymakers. The review of the literature shows that the DSR provides highly accurate early warning signals for crises and future economic slowdowns, outperforming traditional credit-based indicators. By extending the measurement of the DSR back to the 1920s – a novel contribution in this paper – we demonstrate its EWI effectiveness across different historical periods and show that the DSR acts as an upper limit on benign financial deepening. The paper also outlines questions for future research.

Suggested Citation

  • Mathias Drehmann & Mikael Juselius & Sarah Quincy, 2024. "Aggregate Debt Servicing and the Limit on Private Credit," NBER Working Papers 33306, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33306
    Note: CF DAE EFG IFM ME
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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