Has US household deleveraging ended? a model-based estimate of equilibrium debt

Ursel Baumann, Bruno Albuquerque and Georgi Krustev

No 1643, Working Paper Series from European Central Bank

Abstract: The balance sheet adjustment in the household sector was a prominent feature of the Great Recession that is widely believed to have held back the cyclical recovery of the US economy. A key question for the US outlook is therefore whether household deleveraging has ended or whether further adjustment is needed. The novelty of this paper is to estimate a time-varying equilibrium household debt-to-income ratio determined by economic fundamentals to examine this question. The paper uses state-level data for household debt from the FRBNY Consumer Credit Panel over the period 1999Q1 to 2012Q4 and employs the Pooled Mean Group (PMG) estimator developed by Pesaran et al. (1999), adjusted for cross-section dependence. The results support the view that, despite signifiant progress in household balance sheet repair, household deleveraging still had some way to go as of 2012Q4, as the actual debt-to-income-ratio continued to exceed its estimated equilibrium. The baseline conclusions are rather robust to a set of alternative specifications. Going forward, our model suggests that part of this debt gap could, however, be closed by improving economic conditions rather than only by further declines in actual debt. Nevertheless, the normalisation of the monetary policy stance may imply challenges for the deleveraging process by making a given level of household debt less affordable and therefore less sustainable. JEL Classification: C13, C23, C52, D14, H31

Keywords: equilibrium debt; heterogeneous dynamic panels; Household deleveraging; pooled mean group estimator (search for similar items in EconPapers)
Date: 2014-03
Note: 345263
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Has US Household Deleveraging Ended? A Model-Based Estimate of Equilibrium Debt (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20141643

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