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

Marco Lombardi, Madhusudan Mohanty and Ilhyock Shim

Community Development Publications and Reports, 2017, 31 pages

Abstract: Household debt levels relative to GDP have risen rapidly in many countries over the past decade. We investigate the macroeconomic impact of household debt by employing a novel estimation technique proposed by Chudik et al (2016), which tackles the problem of endogeneity in traditional panel regressions. Using data for 54 economies over 1990‒2016, we show that household debt boosts 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 GDP growth in the long run by 0.1 percentage point. Moreover, the negative long-run effects on GDP growth intensifies as the household debt-to-GDP ratio exceeds 70%, suggesting that policy makers are likely to face non-trivial, real costs in stimulating the economy through credit expansion.

Keywords: household debt; consumption; cross-sectional autoregressive distributed lag model; output growth; threshold effect (search for similar items in EconPapers)
JEL-codes: E21 E44 G21 (search for similar items in EconPapers)
Date: 2017
Note: The St. Louis Fed Center for Household Financial Stability and the Private Debt Project hosted three "Tipping Points" Household Debt Research Symposia, 2016-2018. All three sessions were centered on the question of "tipping points" in regard to debt: How and when does household debt move from being wealth-building and productive for households and the economy to being wealth-depleting and destructive for both?; Conference Materials: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/session-list-685749; Conference Executive Summary: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/executive-summary-685748; Tipping Points Conference Series: https://fraser.stlouisfed.org/series/tipping-points-conference-series-9375
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Persistent link: https://EconPapers.repec.org/RePEc:fip:l00101:103208

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