Disentangling the effect of household debt on consumption
We estimate the contemporaneous relationship between household debt and consumption for the period 2006 to 2015. Using Dutch administrative data, we find that the average consumption of households with high debt has decreased much more during the crisis than that of other households. We disentangle this into an effect through the availability of credit for direct consumption and an effect through household debt overhang. On the micro level, the consumption drop is the sharpest for the households who are less able or willing to finance one-off high consumption with new debts after the crisis. On the macro level, however, the drop in consumption of households who have negative home equity for a longer period had a much bigger impact on macro consumption, because their number sharply increased during the crisis. Our results suggest that precautionary savings motives among the highly indebted households contributed most to the consumption decline during the crisis.
|Keywords||Consumption, precautionary savings, spending normalization, financial crisis, administrative data.|
|JEL||Consumer Economics: Empirical Analysis (jel D12), Personal Finance (jel D14), Consumption; Saving (jel E21)|
Ji, K., Teulings, R., & Wouterse, B. (2019). Disentangling the effect of household debt on consumption. Retrieved from http://hdl.handle.net/1765/115997