Browsing by Author "Drehmann, Mathias"

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  • Drehmann, Mathias; Juselius, Mikael; Korinek, Anton (2017)
    Bank of Finland Research Discussion Papers 12/2017
    When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have adverse long-lasting real effects.
  • Drehmann, Mathias; Juselius, Mikael; Korinek, Anton (2018)
    Bank of Finland Research Discussion Papers 10/2018
    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 house-hold 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 properties in the data and show that debt service peaks on average four years after credit booms and is associated with significantly lower output and higher crisis risk. Our results explain the transmission mechanism through which credit booms and busts generate non-monotonic and long-lasting aggregate demand effects and are, hence, crucial for macroeconomic stabilization policy.
  • Juselius, Mikael; Drehmann, Mathias (2020)
    Oxford Bulletin of Economics and Statistics 2
    Published in Bank of Finland Research Discussion Papers 3/2016 http://urn.fi/URN:NBN:fi:bof-201604051073
    In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2017, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, including the lack of above trend output growth during credit booms and the severity of ensuing recessions, without appealing to large shocks or nonlinearities. Estimating the model with data up to 2005, it predicts credit and expenditure paths that closely match actual developments before and during the Great Recession.
  • Juselius, Mikael; Drehmann, Mathias (2016)
    Bank of Finland Research Discussion Papers 3/2016
    Also available in Oxford Bulletin of Economics and Statistics 82 ; 2 https://doi.org/10.1111/obes.12330
    In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2013, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, such as the lack of above-trend output growth during credit booms and the depth and length of ensuing recessions, without appealing to large shocks or non-linearities. Using data up to 2005, our model predicts paths for credit and expenditure that closely match actual developments before and during the Great Recession.
  • Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias (2016)
    Bank of Finland Research Discussion Papers 24/2016
    Published in International Journal of Central Banking, 13, 3, September 2017: 55-89 http://www.ijcb.org/journal/ijcb17q3a2.htm
    Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run.
  • Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias (2017)
    International Journal of Central Banking 4 ; September
    Published in Bank of Finland Research Discussion Papers 24/2016.
    Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing mediumterm economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. An illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to significant output gains and little change in inflation.