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Open AccessArticle

Sustainable Financial Obligations and Crisis Cycles

by Mikael Juselius 1,*,† and Moshe Kim 2
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
*
Author to whom correspondence should be addressed.
Disclaimer: the views presented here are the authors’ and do not necessarily represent those of the Bank of Finland.
Academic Editors: Katarina Juselius and Marc S. Paolella
Econometrics 2017, 5(2), 27; https://doi.org/10.3390/econometrics5020027
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)
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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Juselius, M.; Kim, M. Sustainable Financial Obligations and Crisis Cycles. Econometrics 2017, 5, 27.

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