Report

The Real Effects of Household Debt 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 macroeconomic impact of household debt by employing a novel estimation technique proposed by Chudik et al (2016), which tackles the problem of endogeneity in traditional panel regressions. Using data for 54 economies over 1990‒2016, we show that household debt boosts GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio tends to lower GDP growth in the long run by 0.1 percentage point. Moreover, the negative long-run effects on 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.

JEL Classification: E21; E44; G21;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Community Development Publications and Reports

Publication Date: 2017-10-19

Pages: 31 pages

Note: The St. Louis Fed Center for Household Financial Stability and the Private Debt Project hosted three "Tipping Points" Household Debt Research Symposia, 2016-2018. All three sessions were centered on the question of "tipping points" in regard to debt: How and when does household debt move from being wealth-building and productive for households and the economy to being wealth-depleting and destructive for both?

Note: Conference Materials: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/session-list-685749

Note: Conference Executive Summary: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/executive-summary-685748

Note: Tipping Points Conference Series: https://fraser.stlouisfed.org/series/tipping-points-conference-series-9375