Bank of Finland
P.O. Box 160
Institutional Affiliation: Bank of Finland
Information about this author at RePEc
NBER Working Papers and Publications
|April 2018||Going 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...