Conditional effect of government debt on household debt

Insook Lee

Applied Economics, 2022, vol. 54, issue 24, 2759-2777

Abstract: How does government debt affect household debt? Capitalizing on a model of life-cycle economy populated by households with no bequest motive, this article shows that effect of government debt on aggregate household debt is conditional. If residence-service benefit of house is greater than equity-accrual benefit of house investment, government debt negatively affects household debt. If not, government debt positively affects household debt. This theoretical finding is tested with panel data of 53 countries over 1991–2019. Using system Generalized Method of Moments finds supportive evidence for the conditional effect, which remains robust after adopting external instrumental variable and alternative approach to expectation formation.

Date: 2022
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DOI: 10.1080/00036846.2021.1998332

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