The relationship of household debt and growth in the short and long run

Marco Lombardi, Madhusudan Mohanty and Ilhyock Shim

Empirical Economics, 2022, vol. 63, issue 4, No 6, 1887-1911

Abstract: Abstract Household debt levels relative to GDP have risen rapidly in many countries over the past decade. We investigate the relationship between household debt and growth by employing a novel estimation technique which helps to separate short-run from long-run relationships. Using data for 54 economies over 1990‒2016, we show that an increase in household debt is associated with higher GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio predicts lower GDP growth in the long run by 0.1 percentage point. Moreover, the negative long-run relationship between household indebtedness and 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: 2022
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DOI: 10.1007/s00181-021-02188-z

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