Do households with debt cut back their consumption more in response to shocks?

Apostolos Parla and Reamonn Lydon ()
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Apostolos Parla: Brunel

No 8/RT/21, Research Technical Papers from Central Bank of Ireland

Abstract: We investigate whether household indebtedness affects the response of consumer spending to income and wealth changes. We construct a novel estimate of spending on non-durables to track an unbalanced panel of households between 1993 and 2017. Using this data, we explore how household indebtedness amplifies the response of consumer spending to changes in income and wealth. We assess whether negative and positive shocks imply the same consumption adjustments and whether such mechanism is crisis-specific. Our results indicate that falls in income trigger substantially larger adjustments in consumption than income rises for households with debt, while the findings for wealth are less conclusive. The effects are strongest for households with larger debt-service and debt-to income ratios. These effects are not specific to the financial crisis period.

Keywords: Consumption; Debt; Income; Wealth (search for similar items in EconPapers)
JEL-codes: D14 D31 E21 H31 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-mac
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