Is household debt sustainable in Korea?

Dongyeol Lee and Hyunjoon Lim

Journal of the Asia Pacific Economy, 2015, vol. 20, issue 2, 224-242

Abstract: This paper takes two different approaches to assess the sustainability of household debt in Korea. First, we identify marginal households whose debts are excessive and whose financial soundness is weak, and examine how much these household groups would grow should external shocks occur. This sensitivity analysis shows that the low-income brackets are highly exposed to rollover and default risks, and that a decline in housing prices is an important factor affecting the vulnerability of household debt. Furthermore, we employ a debt dynamics equation and a primary savings reaction function in order to derive the debt limit for each income quintile, and find that the sustainable debt ratio for each income quintile differs in line with the interest rate burden of the household sector, income fluctuations and savings capability. According to the results of this analysis, the first quintile at the bottom income level records debt ratios close to their debt limit, calling for urgent debt restructuring for this income class.

Date: 2015
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DOI: 10.1080/13547860.2014.940760

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