Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland Research Discussion Papers, Bank of Finland

No 11/2014:
Ending over-lending: Assessing systemic risk with debt to cash flow

Bruce A. Ramsay () and Peter Sarlin

Abstract: This paper operationalizes early theoretical contributions of Hyman Minsky and applies these in the context of economic sectors and nations. Following the view of boom-bust asset cycles, depicted by the endogenous build-up of risks and their abrupt unraveling, Minsky highlighted the relationship between debt obligations and cash flows. While leverage is oftentimes linked to the vulnerability of a nation, and hence systemic risk, one less explored measure of leverage is the debt-to-cash flow ratio (Debt/CF). Cash flows certainly have a well-known, academically verified connection to the ability of corporations to service and repay corporate debt. This paper investigates whether the relationship between the flow of a nation's savings to its stock of total debt provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic Debt/CF trends, as well as apply the same procedure to individual economic sectors. This assessment of systemic risk is arranged for presentation within a four-zone framework. In terms of an early-warning indicator, we show that the Debt/CF ratio effectively stratifies systemic risks, and offers a useful platform toward macro-financial sustainability.

Keywords: debt-to-cash flow; debt-to-gross saving; systemic risk; four-zone framework; (follow links to similar papers)

JEL-Codes: E21; F34; G01; H63; (follow links to similar papers)

26 pages, April 3, 2014

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

BoF_DP_1411.pdf    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:bofrdp:2014_011 This page was generated on 2014-12-14 19:21:40