Does consumer debt cause economic recession? Evidence using directed acyclic graphs

Jin Zhang, David Bessler () and David Leatham

Applied Economics Letters, 2006, vol. 13, issue 7, 401-407

Abstract: This study investigates the relationship between consumer debt and aggregate economic activity based on time series methods and directed acyclic graphs (DAG). Quarterly US data, measured over the period 1980 to 2003, on consumer debt, gross domestic product (GDP), interest rates, housing starts, and domestic auto sales, are analysed in an Error Correction Model (ECM). Contemporaneous innovations from this ECM are given a structural representation, using recent developments in DAG modelling. The ECM and DAG components are summarized using innovation accounting techniques (impulse response functions and forecast error variance decomposition). The DAG causal pattern reveals a causal flow from GDP to consumer debt; the subsequent innovation accounting results also show that consumer debt is not exogenous in contrast to GDP and other indicators. This result concurs with a previous study based on Granger causality, but contradicts other works that claim consumer debt is a root cause of aggregate economic performance.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:13:y:2006:i:7:p:401-407

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DOI: 10.1080/13504850500398658

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