Understanding the Macro-Financial Effects of Household Debt: A Global Perspective

By Adrian Alter, Alan Xiaochen Feng, Nico Valckx

April 6, 2018

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Adrian Alter, Alan Xiaochen Feng, and Nico Valckx. Understanding the Macro-Financial Effects of Household Debt: A Global Perspective, (USA: International Monetary Fund, 2018) accessed December 21, 2024

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.

Summary

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.

Subject: Commercial banks, Consumer credit, Consumption, Conventional peg, Exchange rate arrangements, Financial institutions, Foreign exchange, Money, National accounts, Stocks

Keywords: Bank stock, Commercial banks, Consumer credit, Consumption, Debt ratio, Exchange rate arrangements, Financial crises, Financial leverage, Global, Household debt, Leverage, Macro-financial stability, Negative correlation, Neglected crash risk, Standard deviation, Stocks, Subprime crisis, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/076
Stock No:

WPIEA2018076
ISBN:

9781484349861
ISSN:

1018-5941

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