Evaluating the nonlinear relationship between nonfinancial corporate sector leverage and financial stability in the post crisis era

This paper analyzes the relationship between the nonfinancial corporate sector leverage (NFCL) and financial stability in the post crisis era, revealing considerable heterogeneity across the level of financial intermediation (FI). First, we use the financial soundness indicators proposed by the IMF and the generalized dynamic factor model (GDFM) to measure the financial stability represented by the FSI of OECD countries. Second, in a panel quantile regression framework, we examine the effects of NFCL on FSI for different quantiles of FSI. The result shows that the impact of NFCL on financial stability at different levels is asymmetric, which reflects differences in the supply and demand of debt. Third, this paper further discusses the transmission mechanism of FI between NFCL and FSI based on the panel smooth transition regression model (PSTR). We find that the transmission channel of NFCL to financial stability depends on the level of financial intermediation, but with diverging magnitude for the different levels of FI.