The anatomy of consumption in a household foreign currency debt crisis

Gyozo Gyongyosi, Judit Rariga and Emil Verner

No 2733, Working Paper Series from European Central Bank

Abstract: How do households adjust to a large debt shock? This paper studies household responses to a revaluation of foreign currency household debt during a large depreciation in Hungary. Relative to similar local currency debtors, foreign currency debtors reduce consumption expenditures approximately one-for-one with increased debt service, suggesting binding liquidity constraints. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with nonhomothetic preferences and a “flight from quality.” Debt revaluation has no effect on labor market status, hours, or earnings, but there is a small adjustment toward foreign income streams and a substantial increase in home production. JEL Classification: E21, G51, J20

Keywords: flight from quality; home production; marginal propensity to consume (search for similar items in EconPapers)
Date: 2022-09
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Related works:
Working Paper: The Anatomy of Consumption in a Household Foreign Currency Debt Crisis (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222733

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