Long-term debt propagation and real reversals

Mathias Drehmann, Mikael Juselius, Anton Korinek

Research output: Book/ReportCommissioned report


We examine a propagation mechanism that arises from households’ long-term borrowing and show empirically that it has sizable real effects. The mechanism recognises that when there is long-term debt, an impulse to new borrowing generates a predictable hump-shaped path of future debt service. We confirm this pattern using a novel multi-country dataset of debt flows. Whereas new borrowing boosts ouput contemporaneously, debt service depresses output. Credit booms thus lead to predictable reversals in real economic activity several years later. This long-term debt propagation channel is the main reason for why indicators of credit cycles have predictive power for future economic activity.
Original languageEnglish
Place of PublicationHelsinki
PublisherBank of Finland
ISBN (Electronic)978-952-323-434-5
Publication statusPublished - 2023
MoE publication typeD4 Published development or research report or study

Publication series

NameBank of Finland Research Discussion Papers
PublisherBank of Finland
ISSN (Electronic)1456-6184


  • 511 Economics


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