IDEAS home Printed from https://ideas.repec.org/a/kap/reveho/v17y2019i2d10.1007_s11150-018-9424-2.html
   My bibliography  Save this article

Debt repayment problems: short-term and long-term implications for spending

Author

Listed:
  • Merike Kukk

    (Tallinn University of Technology
    Bank of Estonia)

Abstract

The paper investigates the economic consequences of financial difficulties. A unique quarterly panel dataset from 2004–2011 from Estonia, a euro area country, makes it possible to estimate the quarterly spending response to debt repayment problems on top of the effect of income and indebtedness. The results imply that problems lead to a substantial short-term drop in spending. Although spending recovers after the debt repayment problems are resolved, the increase is smaller than the original decline and spending remains at a lower level than before the problems emerged. An important finding is that the longer the problems last, the more severe the decline in spending is. The results suggest that the experience of debt repayment problems has severe long-term economic implications, a cost that should be taken into account when the consequences of indebtedness are assessed.

Suggested Citation

  • Merike Kukk, 2019. "Debt repayment problems: short-term and long-term implications for spending," Review of Economics of the Household, Springer, vol. 17(2), pages 715-740, June.
    • Handle: RePEc:kap:reveho:v:17:y:2019:i:2:d:10.1007_s11150-018-9424-2
    DOI: 10.1007/s11150-018-9424-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11150-018-9424-2
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11150-018-9424-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kukk, Merike, 2016. "How did household indebtedness hamper consumption during the recession? Evidence from micro data," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 764-786.
    2. Mocetti, Sauro & Viviano, Eliana, 2017. "Looking behind mortgage delinquencies," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 53-63.
    3. Dean Karlan & Jonathan Zinman, 2008. "Lying About Borrowing," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 510-521, 04-05.
    4. Bridges, Sarah & Disney, Richard, 2010. "Debt and depression," Journal of Health Economics, Elsevier, vol. 29(3), pages 388-403, May.
    5. Keese, Matthias, 2012. "Who feels constrained by high debt burdens? Subjective vs. objective measures of household debt," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 125-141.
    6. Karen Dynan, 2012. "Is a Household Debt Overhang Holding Back Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 299-362.
    7. Karen Dynan, 2012. "Is a Household Debt Overhang Holding Back Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 299-362.
    8. Merike Kukk & Dmitry Kulikov & Karsten Staehr, 2016. "Estimating Consumption Responses to Income Shocks of Different Persistence Using Self-Reported Income Measures," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(2), pages 311-333, June.
    9. Connor, Gregory & Flavin, Thomas, 2015. "Strategic, unaffordability and dual-trigger default in the Irish mortgage market," Journal of Housing Economics, Elsevier, vol. 28(C), pages 59-75.
    10. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    11. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    12. Robert Breunig & Deborah Cobb-Clark & Xiaodong Gong & Danielle Venn, 2007. "Disagreement in Australian partners’ reports of financial difficulty," Review of Economics of the Household, Springer, vol. 5(1), pages 59-82, March.
    13. Karen E. Dynan & Wendy Edelberg, 2013. "The relationship between leverage and household spending behavior: evidence from the 2007-2009 survey of consumer finances," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 425-448.
    14. Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 434-447, August.
    15. Orla May & Merxe Tudela, 2005. "When is mortgage indebtedness a financial burden to British households? A dynamic probit approach," Bank of England working papers 277, Bank of England.
    16. Merike Kukk, 2016. "What are the triggers for arrears on debt? Evidence from quarterly panel data," Bank of Estonia Working Papers wp2016-9, Bank of Estonia, revised 25 Nov 2016.
    17. Leigh Ann Leung & Catherine Lau, 2017. "Effect of mortgage indebtedness on health of U.S. homeowners," Review of Economics of the Household, Springer, vol. 15(1), pages 239-264, March.
    18. Thomas F. Crossley & Hamish W. Low, 2014. "Job Loss, Credit Constraints, and Consumption Growth," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 876-884, December.
    19. Crook, Jonathan N. & Edelman, David B. & Thomas, Lyn C., 2007. "Recent developments in consumer credit risk assessment," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1447-1465, December.
    20. Burcu Duygan-Bump & Charles Grant, 2009. "Household debt repayment behaviour: what role do institutions play? [‘Welfare implications of the Bankruptcy Reform Act of 1999’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 24(57), pages 108-140.
    21. Andersen, Asger Lau & Duus, Charlotte & Jensen, Thais Lærkholm, 2016. "Household debt and spending during the financial crisis: Evidence from Danish micro data," European Economic Review, Elsevier, vol. 89(C), pages 96-115.
    22. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    23. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 219-234.
    24. Daniel Cooper & Karen Dynan, 2016. "Wealth Effects And Macroeconomic Dynamics," Journal of Economic Surveys, Wiley Blackwell, vol. 30(1), pages 34-55, February.
    25. Agarwal, Sumit & Chomsisengphet, Souphala & Liu, Chunlin, 2011. "Consumer bankruptcy and default: The role of individual social capital," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 632-650, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhiming Cheng & Silvia Mendolia & Alfredo R. Paloyo & David A. Savage & Massimiliano Tani, 2021. "Working parents, financial insecurity, and childcare: mental health in the time of COVID-19 in the UK," Review of Economics of the Household, Springer, vol. 19(1), pages 123-144, March.
    2. Philip Caju & Guillaume Périlleux & François Rycx & Ilan Tojerow, 2023. "A bigger house at the cost of an empty stomach? The effect of households’ indebtedness on their consumption: micro-evidence using Belgian HFCS data," Review of Economics of the Household, Springer, vol. 21(1), pages 291-333, March.
    3. Jaanika Meriküll & Tairi Rõõm, 2020. "Stress Tests of the Household Sector Using Microdata from Survey and Administrative Sources," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 203-248, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Merike Kukk, 2023. "What are the triggers for arrears on debt over a business cycle? Evidence from panel data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2811-2833, July.
    2. Yunchao Cai & Selamah Abdullah Yusof & Ruzita Bt Mohd Amin & Mohd Nahar Mohd Arshad, 2021. "The Multi-dimensional Effect of Household Debt on Urban Individual Well-Being in Klang Valley Malaysia," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 158(1), pages 23-44, November.
    3. Yilmazer, Tansel & Babiarz, Patryk & Liu, Fen, 2015. "The impact of diminished housing wealth on health in the United States: Evidence from the Great Recession," Social Science & Medicine, Elsevier, vol. 130(C), pages 234-241.
    4. Kukk, Merike, 2016. "How did household indebtedness hamper consumption during the recession? Evidence from micro data," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 764-786.
    5. Konstantina Manou & Panagiotis Palaios & Evangelia Papapetrou, 2019. "Housing wealth, household debt and financial assets: are there implications for consumption?," Working Papers 263, Bank of Greece.
    6. Apostolos Fasianos & Reamonn Lydon, 2022. "Do households with debt cut back their consumption more? New evidence from the United Kingdom," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 737-760, July.
    7. Zhang, Dongyang & Guo, Rui, 2020. "The consumption response to household leverage in China: The role of investment at household level," International Review of Financial Analysis, Elsevier, vol. 71(C).
    8. Andersen, Henrik Yde, 2021. "Pension taxation, household debt and the real economy," Nationaløkonomisk tidsskrift, Nationaløkonomisk Forening, vol. 2021(1), pages 1-14.
    9. Can Xu & Jan P. A. M. Jacobs & Jakob de Haan, 2023. "Does Household Borrowing Reduce the Trade Balance? Evidence from Developing and Developed Countries," Open Economies Review, Springer, vol. 34(4), pages 759-787, September.
    10. John Carter Braxton & Edward S. Knotek, 2014. "Consumer Debt Dynamics: Follow the Increasers," Working Papers (Old Series) 1401, Federal Reserve Bank of Cleveland.
    11. O’Toole, Conor & Slaymaker, Rachel, 2021. "Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods," Journal of Banking & Finance, Elsevier, vol. 133(C).
    12. Yuliya Demyanyk & Dmytro Hryshko & Maria Jose Luengo-Prado & Bent E. Sorensen, 2015. "The rise and fall of consumption in the '00s," Working Papers 15-12, Federal Reserve Bank of Boston.
    13. Youngjoo Choi & Jong Chil Son, 2016. "Nonlinear Effect of Household Debt on Consumption: Evidence from Household-level Panel Data in Korea," Economics Bulletin, AccessEcon, vol. 36(2), pages 1083-1094.
    14. Mesly, Olivier, 2023. "Irrational exuberance and deception — Why markets spin out of control," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    15. Li, Jie & Wu, Yu & Xiao, Jing Jian, 2020. "The impact of digital finance on household consumption: Evidence from China," Economic Modelling, Elsevier, vol. 86(C), pages 317-326.
    16. Siodla, James, 2020. "Debt and taxes: Fiscal strain and US city budgets during the Great Depression," Explorations in Economic History, Elsevier, vol. 76(C).
    17. Atte Oksanen & Mikko Aaltonen & Kati Rantala, 2015. "Social Determinants of Debt Problems in a Nordic Welfare State: a Finnish Register-Based Study," Journal of Consumer Policy, Springer, vol. 38(3), pages 229-246, September.
    18. Carlos Garriga & Aaron Hedlund, 2020. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," American Economic Review, American Economic Association, vol. 110(6), pages 1603-1634, June.
    19. Jonathan Kearns & Mike Major & David Norman, 2021. "How Risky Is Australian Household Debt?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(3), pages 313-330, September.
    20. Sarah Brown & Pulak Ghosh & Karl Taylor, 2012. "The Existence and Persistence of Household Financial Hardship," Working Papers 2012022, The University of Sheffield, Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:reveho:v:17:y:2019:i:2:d:10.1007_s11150-018-9424-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.