The Macroeconomic Implications of Household Debt: An Empirical Analysis

Yk Kim

No 1103, Working Papers from Trinity College, Department of Economics

Abstract: Multi-equation econometric frameworks are used to investigate the impact of household debt on aggregate performance in US. In the vector autoregression analysis capturing the transitory feedback effects, we observe a bidirectional positive feedback process between aggregate income and debt. According to the estimation of vector error correction models, there are negative long-run relationships between household debt and output. The empirical model has also been extended to include investment and corporate debt. The results are in contrast with the results of empirical model without corporate sector variables. The negative long-run relationship between household debt and GDP ceases to exist as shown by the positive cointegrating coefficients in the cointegrating equations. Impulse response functions from these extended empirical models also indicate that investment may be an important channel through which household debt affects output.

Keywords: Household Debt; Financial Instability Hypothesis; Cointegration; VAR; VECM (search for similar items in EconPapers)
JEL-codes: C32 E21 E32 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2011-05
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (2)

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http://www3.trincoll.edu/repec/WorkingPapers2011/wp11-03.pdf First version, 2011 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tri:wpaper:1103

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