NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Mikael Juselius

Bank of Finland
P.O. Box 160
FI-00101 Helsinki
Finland

E-Mail: Mikael.Juselius@bof.fi
Institutional Affiliation: Bank of Finland

NBER Working Papers and Publications

April 2018Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms
with Mathias Drehmann, Anton Korinek: w24549
Traditional economic models have had difficulty explaining the non-monotonic real effects of credit booms and, in particular, why they have predictable negative after-effects for up to a decade. We provide a systematic transmission mechanism by focusing on the flows of resources between borrowers and lenders, i.e. new borrowing and debt service. We construct the first cross-country dataset of these flows for a panel of household debt in 16 countries. We show that new borrowing increases economic activity but generates a pre-specified path of debt service that reduces future economic activity. The protracted response in debt service derives from two key analytic properties of credit booms: (i) new borrowing is auto-correlated and (ii) debt contracts are long term. We confirm these propertie...
 
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