Household inequality and financial stability risks: exploring the impact of changes in consumer prices and interest rates

Daniel Dieckelmann and Julian Metzler

Financial Stability Review, 2022, vol. 2

Abstract: Since the start of 2022, euro area households have seen the largest increase in consumer prices in decades and the first increase in interest rates in over ten years. For some households – especially those with lower incomes – these shocks could lead to financial distress, including debt defaults. Simulations of the impact of rising consumer prices and interest rates on the near-term financial health of households reveal a more pronounced risk of default in lower income quintiles. For most countries, systemic risk arising from loans originated in lower income quintiles, which represent a lower share of total household debt than loans originated in higher income quintiles, is limited, although it is more significant in some countries. Policy support aimed at dampening the impact of shocks could help to mitigate the risk. Across the euro area, second-round effects stemming from foregone consumption in response to higher financial burdens could weigh on economic performance and further impair banks’ asset quality. JEL Classification: D14, D63, G21, G51

Keywords: financial stability; household inequality; inflation; interest rates; lower income; non-performing loans (search for similar items in EconPapers)
Date: 2022-11
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