Leaning Against the Credit Cycle


Paolo Gelain

Gisle J. Natvik

Download PDF
(539 KB)

2017-18 | August 1, 2017

How should a central bank act to stabilize the debt-to-GDP ratio? We show how the persistent nature of household debt shapes the answer to this question. In environments where households repay mortgages gradually, surprise interest hikes only weakly influence household debt, and tend to increase debt-to-GDP in the short run while reducing it in the medium run. Interest rate rules with a positive weight on debt-to-GDP cause indeterminacy. Compared to inflation targeting, debt-to-GDP stabilization calls for a more expansionary policy when debt-to-GDP is high, so as to deflate the debt burden through inflation and output growth.

Article Citation

Natvik, Gisle J., Kevin J. Lansing, and Paolo Gelain. 2017. “Leaning Against the Credit Cycle,” Federal Reserve Bank of San Francisco Working Paper 2017-18. Available at https://doi.org/10.24148/wp2017-18

About the Author
Kevin Lansing
Kevin Lansing is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Kevin Lansing