Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/212286
Authors: 
Sarlin, Peter
Ramsay, Bruce A.
Year of Publication: 
2014
Series/Report no.: 
Bank of Finland Research Discussion Papers 11/2014
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 e effectively stratifies systemic risks, and offers a useful platform toward macro-financial sustainability.
Subjects: 
debt-to-cash flow
debt-to-gross saving
systemic risk
four-zone framework
JEL: 
E21
F34
G01
H63
Persistent Identifier of the first edition: 
ISBN: 
978-952-6699-79-0
Document Type: 
Working Paper

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