The Real Effects of Household Debt in the Short and Long Run

42 Pages Posted: 27 Jan 2017

See all articles by Marco J. Lombardi

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department

Ilhyock Shim

Bank for International Settlements (BIS)

Date Written: January 1, 2017

Abstract

Household debt levels relative to GDP have risen rapidly in many countries over the past decade. We investigate the macroeconomic impact of such increases by employing a novel estimation technique proposed by Chudik et al (2016), which tackles the problem of endogeneity present in traditional regressions. Using data on 54 economies over 1990-2015, we show that household debt boosts consumption and GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point. Our results suggest that the negative long-run effects on consumption tend to intensify as the household debt-to-GDP ratio exceeds 60%. For GDP growth, that intensification seems to occur when the ratio exceeds 80%. Finally, we find that the degree of legal protection of creditors is able to account for the cross-country variation in the long-run impact.

Keywords: household debt, consumption, cross-sectional autoregressive distributed lag model, output growth, threshold effect

JEL Classification: E21, E44, G21

Suggested Citation

Lombardi, Marco Jacopo and Mohanty, Madhusudan S. and Shim, Ilhyock, The Real Effects of Household Debt in the Short and Long Run (January 1, 2017). BIS Working Paper No. 607, Available at SSRN: https://ssrn.com/abstract=2906555

Marco Jacopo Lombardi (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Ilhyock Shim

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

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