Finance and Business Cycles: The Credit-Driven Household Demand Channel

Mian, Atif; Sufi, Amir

doi:10.1257/jep.32.3.31

Cited by 145 publications

(38 citation statements)

References 69 publications

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“…Our results are consistent with the view that credit supply shocks, as postulated e.g. by Mian et al (2017) and Mian and Su (2018), lead to signicant aggregate demand eects that are dicult to counteract by macroeconomic policymakers. Although we nd that monetary policy systematically responds to credit booms and busts, it does not fully oset the eects of credit uctuations on aggregate demand, even if we only focus on periods in which the economy was not in a liquidity trap.…”

Section: Introductionsupporting

confidence: 90%

Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms

Drehmann¹,

Juselius²,

Korinek³

2018

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Traditional economic models have had difficulty explaining the non-monotonic real effects of credit booms and, in particular, why they have predictable negative after-effects for up to a decade. We provide a systematic transmission mechanism by focusing on the flows of resources between borrowers and lenders, i.e. new borrowing and debt service. We construct the first crosscountry dataset of these flows for a panel of household debt in 16 countries. We show that new borrowing increases economic activity but generates a pre-specified path of debt service that reduces future economic activity. The protracted response in debt service derives from two key analytic properties of credit booms: (i) new borrowing is auto-correlated and (ii) debt contracts are long term. We confirm these properties in the data and show that debt service peaks on average four years after credit booms and is associated with significantly lower output and higher crisis risk. Our results explain the transmission mechanism through which credit booms and busts generate non-monotonic and long-lasting aggregate demand effects and are, hence, crucial for macroeconomic stabilization policy.

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Section: Introductionsupporting

confidence: 90%

Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms

Drehmann¹,

Juselius²,

Korinek³

2018

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“…As a final exercise, we examine the 2000s boom in the United States. A large body of evidence supports the view that credit supply expansion to households in the United States fueled household demand (see, e.g., Mian and Sufi (2018) and citations therein). For example, from 2000 to 2007, the aggregate household debt to income ratio experienced a large increase.…”

Section: Column (1) Of Panel a Ofmentioning

confidence: 82%

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

Mian¹,

Sufi²,

Verner

2020

The Journal of Finance

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106

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Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.

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“…With these potential limitations in mind, in our empirical analysis, we provide evidence that strengthening the contribution of immovable property tax on the overall tax revenues has a negative short‐run impact on house prices. However, in order to have a comprehensive assessment of the overall macroeconomic impact of changes in immovable property tax, it is necessary to evaluate their long‐term impact on the stability of the housing market and households’ demand (Mian & Sufi, ; Mian, Sufi, & Verner, ). In a longer‐term perspective the negative impact of immovable property taxes on house price dynamics can be counterbalanced by a greater stability of real estate markets, lower risks of speculative bubbles and household debt overhang.…”

Section: Discussionmentioning

confidence: 99%

House prices and immovable property tax: Evidence from OECD countries

et al. 2019

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This paper studies the impact of changes in immovable property tax revenues on the growth rate of house prices by analysing a panel of 34 OECD countries over the period 1970–2014. Starting from the annual series of immovable property tax revenues, we isolate years of significant shifts in the property tax regime and study their impact on house prices. We find a strong negative relationship between increases in immovable property tax revenues and house prices. This relationship is robust to the inclusion of cyclical determinants of house prices, country and year fixed effects, and country‐specific linear trends. We also propose an instrumental variable strategy based on countries’ legal origins that confirms a statistically significant negative impact of such taxes in the short run.

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Finance and Business Cycles: The Credit-Driven Household Demand Channel

Cited by 145 publications

References 69 publications

Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms

Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

House prices and immovable property tax: Evidence from OECD countries

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