The relationship of household debt and growth in the short and long run

Abstract

Household debt levels relative to GDP have risen rapidly in many countries over the past decade. We investigate the relationship between household debt and growth by employing a novel estimation technique which helps to separate short-run from longrun relationships. Using data for 54 economies over 1990-2016, we show that an increase in household debt is associated with higher GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio predicts lower GDP growth in the long run by 0.1 percentage point. Moreover, the negative long-run relationship between household indebtedness and GDP growth intensifies as the household debt-to-GDP ratio exceeds 70%, suggesting that policy makers are likely to face non-trivial, real costs in stimulating the economy through credit expansion. KeywordsHousehold debt • Consumption • Cross-sectional autoregressive distributed lag model • Output growth • Threshold effectWe are grateful for the Editor (Robert M Kunst) and two anonymous referees for their helpful comments and suggestions. We thank participants in St Louis Fed Tipping Points Symposium on "Mapping and understanding the impact of debt on household financial well-being and economic growth"

Household Debt and Economic Growth: The Role of Institutional Quality

“…This study further assesses the interaction between household debt and institutional quality. Lombardi et al (2017) found that the level of the legal protection of creditors acts as an indicator of institutional quality, causing lower levels of the economy to correspond to higher levels of household indebtedness. Their findings suggest that households only borrow when they have strong faith and confidence in institutions.…”

“…This study contributes to the literature in three ways. First, although previous research has addressed the impact of household debt on growth, for instance, Alter et al (2018), Cecchetti et al (2011), and Lombardi et al (2017), this study includes the importance of institutional quality, which is currently under-researched. The research focuses on institutional quality using the ICRG database in response to the study by Khan et al (2019).…”

“…Data availability on household debt is a major challenge for some countries, which justifies the study sample. Consistent with Cecchetti et al (2011) and Lombardi et al (2017), we used household debt to GDP as the measure for household debt. As for economic growth, we utilised real GDP per capita growth, defined as the increase in gross domestic product per capita at consistent prices, obtained from the World Bank Database.…”

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“…This study contributes to the literature in three ways. First, although previous research has addressed the impact of household debt on growth, for instance, Alter et al (2018), Cecchetti et al (2011), and Lombardi et al (2017), this study includes the importance of institutional quality, which is currently under-researched. The research focuses on institutional quality using the ICRG database in response to the study by Khan et al (2019).…”

A needs assessment: Developing a non formal economic education framework to improve economic management capabilities and earning activities of housewives credit institutions customers

“…Of the 10 respondents, there are 8 people who use this method even though they are aware that they will be more in debt. Subsequent consumption growth should be positive because additional borrowing may well have been motivated by higher expected permanent income [15] . What happened in Baleturi village was the opposite of how debt should be managed.…”