Deleveraging in a Highly Indebted Property Market: Who does it and are there Implications for Household Consumption?

A distinguishing feature of the period preceding the 2007/2008 financial crisis was the sizeable increase in private sector debt observed across many countries. A key component of household liabilities is mortgage debt and with many countries experiencing persistent increases in house prices from the mid‐1990s, a marked increase in this aspect of household leverage was observed. While aggregate statistics across countries confirm reductions in personal debt levels in recent years, relatively few sources of micro data are available to examine the nature of the deleveraging process at the household level. In this paper, using a unique dataset, we examine deleveraging amongst a representative sample of mortgaged Irish households. We identify the characteristics of households engaged in deleveraging and find that it is those households who can afford to deleverage who do. Furthermore we find some tentative evidence to suggest that the decision to deleverage has negative implications for household consumption.     

How did household indebtedness hamper consumption during the recession? Evidence from micro data

The paper investigates the extent to which household indebtedness suppressed consumption during the economic downturn in 2008–2009. The paper uses a unique quarterly panel dataset containing financial information on over 100 000 individuals. The dataset covers the period 2005–2011, when there were large changes in credit volumes, income and consumption in Estonia, a new EU member country. The estimations show that indebtedness measured by the debt-to-income ratio and the debt service ratio hampers consumption over the whole business cycle. The negative impact of the debt service ratio is, however, substantially stronger during the recession than in the pre-crisis and post-crisis periods, while the negative effect of the debt-to-income ratio is relatively stable over the sample period. The findings suggest that household indebtedness is amplifying the recession and the debt repayment burden indicates the mechanism which is at work.     

The Corporate State,Economic Performance,and Social Policy

We use the Survey of Consumer Finances to analyze changes in U.S. household debt between 1989 and 2013. We focus on how income and debt levels have changed, and what this means for future economic growth and living standards. Prior to the Great Recession, U.S. households had record high debt levels and record low savings rates. Highly leveraged consumption boosted economic growth. However, large debt burdens have led many families to deleverage. Our study finds that deleveraging has been insufficient. Although debt payments have fallen relative to household income, this is mainly due to low interest rates. Debt levels, especially for home mortgages, remain high by historical standards and portend continued stagnation due to lower consumer spending.     

Income Distribution,Household Debt and Growth in Modern Financialized Economies

Abstract:

We analyze some core features of the institutional transformation of the Canadian and U.S. economies over the last half century, as they became increasingly financialized economies resting on household consumption as the key contributor to economic growth, despite weak growth in real wages and personal disposable income. This growth in consumption spending is highly fragile not only because it is a debt-led growth that has relied on an unsustainable expansion of household indebtedness largely dependent on credit bubbles in the housing market, but also because of the perverse form of this indebtedness. Studied from the angle of disaggregated household consumption/saving behavior, it is the poorest and most vulnerable households who have been building up unsustainable debt, thereby presaging increasing financial fragility and crises.     

Housing market dynamics and macroprudential policies

In this paper, we analyze the implications of macroprudential and monetary policies for credit cycles, housing market stability and spillovers to consumption. We consider a countercyclical loan‐to‐value (LTV) policy that responds to a credit‐to‐income ratio, and we compare its effectiveness with a permanent tightening of the LTV ratio and a monetary policy rule that responds to credit. To this end, we construct a dynamic stochastic general equilibrium model with housing market, household debt and collateral constraints, and we estimate it with Canadian data using Bayesian methods. Our study suggests that a countercyclical LTV ratio is a useful policy to reduce spillovers from the housing market into consumption and to lean against housing market boom–bust cycles. It performs better than the permanent tightening of the LTV ratio—a policy that has been used in a number of countries—and the monetary policy rule, both in terms of the stabilization of household indebtedness and spillovers into consumption. Monetary policy that leans against the wind is the least desirable due to its large adverse consequences on the real economy.     

Household debt,macroprudential rules,and monetary policy

Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. In this paper, we ask whether monetary policy should lean against the household indebtedness or macroprudential policies are better suited for the task. To provide a quantitative answer, we develop a small open economy dynamic stochastic general equilibrium model featuring a micro-founded banking sector. We estimate the model using Canadian data and conduct policy experiments. Our findings favor macroprudential approach to reining in indebtedness: using monetary policy that reacts to household debt increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.     

Broke,Ill, and Obese: Is There an Effect of Household Debt on Health?

We analyze the association between household indebtedness and different health outcomes using data from the German Socio‐Economic Panel from 1999 to 2009. We control for unobserved heterogeneity by applying fixed‐effects methods and furthermore use a subsample of constantly employed individuals plus lagged debt variables to reduce problems of reverse causality. We apply different measures of household indebtedness, such as the percentage shares of household income spent on consumer credit and home loan repayments (which indicate the severity of household indebtedness) and a binary variable of relative overindebtedness (which indicates a precarious debt situation). We find all debt measures to be strongly correlated with health satisfaction, mental health, and obesity. This relationship vanishes for obesity after controlling for unobserved heterogeneity while it stays significant with respect to worse physical and mental health.     

Political aspects of household finance: debt,wage bargaining,and macroeconomic (in)stability

The recent literature has shown that income inequality is one of the main causes of borrowing and debt accumulation by working households. This article explores the possibility that household indebtedness is an important cause of rising income inequality. If workers experience rising debt burdens, their cost of job loss may rise if they need labor-market income to continue borrowing and servicing existing debt. This, in turn, will reduce their bargaining power and increase income inequality, inducing workers to borrow more to maintain consumption standards, and so creating a vicious circle of rising inequality, job insecurity, and indebtedness. We believe that these dynamics may have contributed to observed simultaneous increases in income inequality and household debt prior to the recent financial crisis. To explore the two-way interaction between inequality and debt, we develop an employment rent framework that explicitly considers the impact of workers’ indebtedness on their perceived cost of job loss. This is embedded in a neo-Kaleckian macro model in which inequality spurs debt accumulation that contributes to household consumption spending and hence demand formation. Our analysis suggests that (a) workers’ borrowing behavior plays a crucial role in understanding the character of demand and growth regimes; (b) debt and workers’ borrowing behavior play an important role in the labor market by influencing workers’ bargaining power; and (c) through such channels, workers’ borrowing behavior can be a decisive factor in the determination of macroeconomic (in)stability.     

Financial Insecurity in a World of Plenty

Abstract

The U.S. economy is addicted to the simulative impacts of household borrowing. Household debt has grown dramatically since the 1990s and has served to mitigate the detrimental effects of stagnant household wages. The accumulation of this debt has also had the macroeconomic impact of stimulating the economy, pushing it closer towards full employment. However does full employment stimulated by household indebtedness actually represent economic progress? It is argued that even the poorest citizen in a modern industrialized society is better off than a king of feudal Europe, yet in the United States such material prosperity is often tied to social insecurity thanks to debt. The growth of this debt has been enabled by a financial system that has evolved dramatically over the past forty years. The U.S. financial system’s primary role is no longer to finance investment but is rather a tool that enables a separation of ownership from use. Debt has fueled corporate profits which have enriched the shareholding class while at the same time the system has reduced the financial security of the majority of workers. This article crystalizes these issues by analyzing the differentials in financial circumstances faced by workers and shareholders in several major U.S. firms.     

The drivers of household indebtedness reconsidered: An empirical evaluation of competing arguments on the macroeconomic determinants of household indebtedness in OECD countries

Abstract

Household debt is at a record high in most Organisation for Economic Co-operation and Development (OECD) countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This article empirically tests 7 competing hypotheses on the macroeconomic determinants of household indebtedness together in one econometric study. Existing arguments suggest that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population, and the short-term interest rate drive household indebtedness. We formulate these arguments as hypotheses and test them for a panel of 13 OECD countries over the period 1993–2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.     

Relative Income and Indebtedness: Evidence from Panel Data

We examine patterns of indebtedness in the Panel Study of Income Dynamics, focusing on the period surrounding the housing bubble and its aftermath (i.e., 1999–2009). Leverage increased across households, but most quickly among lower income households during this period. We find additionally that leverage grew faster for households with lower relative income compared to other households in similar demographic groups or within a state controlling for own income. Together, these findings provide evidence for the thesis that the rising indebtedness of households in the U.S. is related to high levels of inequality, and that “Veblen effects,” whereby relative income matters for individual well‐being and decisions, may contribute to rising household indebtedness.     

HOUSEHOLD DEBT AND ATTITUDES TOWARD RISK

We explore the relationship between attitudes toward risk and the level of debt at the household level for a sample of households drawn from the U.S. Panel Study of Income Dynamics (PSID) over the period 1984 to 2007. Using a sequence of questions from the 1996 PSID, we analyze the implications of interpersonal differences in attitudes toward risk for the accumulation of unsecured debt, secured debt, and total debt at the household level. Our empirical findings suggest that attitudes toward risk are an important determinant of the level of debt acquired at the household level with risk aversion being inversely related to the level of debt accumulated by households.     

Inequality and Crisis: Conspicuous Consumption as the Missing Link in the Portuguese Case

Portuguese household debt increased above GDP between 2000 and 2007. This article uses conspicuous consumption to explain credit demand dynamics. The author develops an institutionalist framework and consider how rapid high inequalities and increasing top income share favored conspicuous consumption and climbing household debt.     

What causes household debt to increase in South Africa?

The 2007–2008 US subprime mortgage crisis evolved into a financial crisis that negatively affected many economies in the world and was afterwards widely referred to as the global financial crisis. Since the beginning of this financial crisis of 2008–2009, South Africa experienced a significant increase in its household debt to income ratio. In the main, this paper investigates the prominent factors contributing to the rise in the level of household debt in South Africa. Specifically, we construct a model for South African household debt through the application of a Vector Error Correction Model (VECM). We employ quarterly time series data throughout the timeline 1985 Q1 to 2012 Q1 and all the econometric tests are analyzed using the statistical software package EViews 7. Our results confirmed the existence of a long run cointegrating relationship between household debt and other macroeconomic determinants. Increasing household debt was found to be significantly affected by positive changes in consumer price index, gross domestic product and household consumption. Also, house prices and household savings were found to positively contribute to a rise in household debt but this relationship was found to be statistically insignificant. Alternatively, household borrowing was found to be significantly and insignificantly affected by negative changes in income and prime rate, respectively. Ultimately, the existence of a long run cointegrated relationship enabled us to build an error correction model for household debt which will facilitate future forecasting.     

Transmission of monetary policy in times of high household debt

This paper explores whether the degree of household indebtedness can affect the effectiveness of monetary policy. We take an interacted panel VAR approach, using a panel of 23 countries, thereby obtaining several interesting findings, such as the responses of consumption and investment to monetary shocks are stronger in high levels of household debt. Furthermore, such responses become larger in a contractionary monetary policy stance rather than in an expansionary one, which suggests that monetary policy shocks have asymmetric effects. We have also found that monetary policy has a relatively larger impact in countries with higher share of adjustable-rate loans. Finally, we have found that when a country is in a high-debt state and in a contractionary policy stance, monetary policy is more powerful in countries with a higher share of adjustable-rate loans. We conjecture that these findings support the presence of a cash-flow channel with respect to the transmission of monetary policy in a high household debt state.     

Household Debt,Consumption, and Income Inequality

Using the Johansen and Engle–Granger cointegration tests, we show that there is one cointegrating relationship between household debt, consumption, and income inequality in the United States for the period from 1929 to 2009. Given this result, we use a Vector Error-Correction model to further understand the dynamics among the three variables. Results indicate that increases in income inequality and consumption directly contribute to increases in household debt. Interestingly, the results reveal some feedback from household debt to income inequality. We also show that debt-driven consumption should be viewed with caution as the results show that increases in household debt correspond with future declines in the rate of consumption.     

The Hunger of Old Women in Rural Tanzania: Can Subjective Data Improve Poverty Measurement?

On average, women in Tanzania are slightly less likely than men to say that they are “always/often without enough food to eat”—but this masks a much higher rate of self‐reported food deprivation among elderly rural women. Official Tanzanian poverty statistics are, however, based on a methodology which presumes equal sharing per equivalent adult within the household. This paper combines subjective and objective micro‐data from Tanzania's 2007 Household Budget Survey and 2007 Views of the People Survey. By imputing individual consumption based on the relative probability of self‐reported food deprivation, it provides an example of the possible importance of one type of intra‐household inequality—i.e., the hunger of old women—for poverty measurement. Implications include the complexity of gendered intra‐household inequality and the importance of “technical” poverty measurement choices for public policy priorities, such as old age pensions.     

Household debt and spending during the financial crisis: Evidence from Danish micro data

We use data for nearly 500,000 Danish households to study the relationship between household leverage prior to the financial crisis of 2007–2009 and the development in spending over the course of the crisis. We find a strong negative correlation between pre-crisis leverage and the change in spending during the crisis. This reflects that highly levered households spent a larger share of their income than their less-levered peers prior to the crisis, resulting in larger increases in debt in these years. Once we condition on the size of the pre-crisis change in debt, a high level of debt is no longer associated with a larger spending decline. Our results suggest that the larger decline in spending among high-leverage households is the result of a spending normalization pattern that is also found in other years, rather than a causal effect of high debt levels suppressing household spending during the crisis.     

What keeps long-term U.S. interest rates so low?

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.     

Government expenditure,external and domestic public debt,and economic growth

This paper analyzes the relationship between government expenditure, tax on returns to assets, public debt, and growth in an endogenous growth model. Public debt is composed of two components, domestic debt and external debt. We show conditions for existence, uniqueness, and multiplicity of the steady states. More precisely, existence of steady state requires a sufficiently high productivity and a sufficiently low tax on returns to assets. We also provide the effects of an increase in the tax rate on returns to assets on the steady state. In particular, the relation between public spending and the tax rate has a bell shape. Domestic debt unambiguously increases with tax whereas external debt displays an inverted U‐shaped curve. A high tax rate leads to a reallocation of public debt in favor of domestic debt (to the detriment of external debt). The effect of taxation on consumption (and production) also displays a nonlinear pattern when the output elasticity of capital is lower than unity (the effect is monotonously increasing if this elasticity is unity). We also derive the conditions under which a tax increase can boost or reduce the balanced growth rate.