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Econometrics 2017, 5(2), 27; doi:10.3390/econometrics5020027

Sustainable Financial Obligations and Crisis Cycles

1
Monetary Policy and Research Department, Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
2
Department of Economics, University of Haifa, Mount Carmel, Haifa 31905, Israel
Disclaimer: the views presented here are the authors’ and do not necessarily represent those of the Bank of Finland.
*
Author to whom correspondence should be addressed.
Academic Editors: Katarina Juselius and Marc S. Paolella
Received: 28 February 2017 / Revised: 23 May 2017 / Accepted: 13 June 2017 / Published: 22 June 2017
(This article belongs to the Special Issue Recent Developments in Cointegration)
View Full-Text   |   Download PDF [384 KB, uploaded 22 June 2017]   |  

Abstract

The ability to distinguish between sustainable and excessive debt developments is crucial for securing economic stability. By studying US private sector credit loss dynamics, we show that this distinction can be made based on a measure of the incipient aggregate liquidity constraint, the financial obligations ratio. Specifically, as this variable rises, the interaction between credit losses and the business cycle increases, albeit with different intensity depending on whether the problems originate in the household or the business sector. This occurs 1–2 years before each recession in the sample. Our results have implications for macroprudential policy and countercyclical capital-buffers. View Full-Text
Keywords: debt sustainability; credit losses; financial crises; financial obligations; smooth transition regression; non-linear cointegration debt sustainability; credit losses; financial crises; financial obligations; smooth transition regression; non-linear cointegration
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Juselius, M.; Kim, M. Sustainable Financial Obligations and Crisis Cycles. Econometrics 2017, 5, 27.

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