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Understanding the Macro-Financial Effects of Household Debt: A Global Perspective
Author:
Mr. Adrian Alter
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https://orcid.org/0000-0003-4752-4808
,
Alan Xiaochen Feng null

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Nico Valckx null

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https://orcid.org/0000-0001-5808-9093
Series:
IMF Working Papers
Volume/Issue:
Volume 2018: Issue 076
Language:
English
Publication Date:
06 Apr 2018
DOI:
https://doi.org/10.5089/9781484349861.001
ISBN:
9781484349861
ISSN:
1018-5941
Pages:
49
Keywords:
WP; debt ratio; Household debt; financial crises; neglected crash risk; leverage; macro-financial stability; standard deviation; bank stock; negative correlation; subprime crisis; financial leverage; Exchange rate arrangements; Stocks; Consumption; Commercial banks; Consumer credit; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We confirm the negative relationship between household debt and future GDP growth documented in Mian, Sufi, and Verner (2017) for a wider set of countries over the period 1950–2016. Three mutually reinforcing mechanisms help explain this relationship. First, debt overhang impairs household consumption when negative shocks hit. Second, increases in household debt heighten the probability of future banking crises, which significantly disrupts financial intermediation. Third, crash risk may be systematically neglected due to investors’ overoptimistic expectations associated with household debt booms. In addition, several institutional factors such as flexible exchange rates, higher financial development and inclusion are found to mitigate this impact. Finally, the tradeoff between financial inclusion and stability nuances downside risks to growth.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund