High interest rate and household indebtedness
Economic theory suggests that tighter monetary policy will motivate households to borrow less. But higher interest rates may cause lower income growth and weaker debtor cash flows to finance repayment, which will in turn pull household indebtedness up. Moreover, this second force is most potent for those households who initially are the most indebted and therefore are likely to be a main source of concern when it comes to financial stability.
In this paper, Fagereng et al. use administrative records covering the universe of Norwegian households over 22 years from 1994 to 2015 in order to document how household indebtedness responds to monetary policy. They find:
- On average, tighter monetary policy reduces debt-to-income moderately in the short run;
- It also holds for households with both high debt-to income and high probabilities of job loss, a group likely to be financially vulnerable and thus of primary interest for financial stability considerations.
How Does Monetary Policy Affect Household Indebtedness?
Authors: Andreas Fagereng, Magnus A. H. Gulbrandsen, Martin B. Holm, Gisle J. Natvik
From: BI Norwegian Business School, Norges Bank, University of Oslo
The macroeconomic determinants of household indebtedness
In this paper Dumitrescu et al. use data from 26 OECD countries for the period of from 2002 to 2020 to analyze the macroeconomic determinants of household debt in developed economies. They find:
- Economic growth leads to lower household debt, but the beneficial effect decreases as the level of household debt increases;
- Inflation lowers household borrowing only if the level of debt is high;
- Higher house prices lead to higher household debt, with the impact becoming stronger as the level of debt is higher;
- Investments go hand in hand with household debt, and higher investments lead to higher levels of borrowing, even when household debt is already high;
- Mortgage interest rates are positively linked with household debt, starting with higher debt levels;
- A rising unemployment rate leads to lower household debt, but the link becomes weaker as the level of debt increases.
Macroeconomic Determinants of Household Debt in OECD Countries
Authors: Bogdan Andrei Dumitrescu, Adrian Enciu, Cătălina Adriana Hândoreanu, Carmen Obreja, Florin Blaga
From: Bucharest University of Economic Studies
