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What are the triggers for arrears on debt over a business cycle? Evidence from panel data

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  • Merike Kukk

Abstract

The paper investigates the triggers of arrears on debt in a full recourse euro area country. An extensive individual‐level quarterly panel dataset enables quarterly arrears on debt to be tracked while controlling for individual specific heterogeneity. The estimations show that lower income and higher debt service ratios are associated with a higher probability of arrears, confirming the “ability to pay” hypothesis. The results reveal different debt repayment behaviour for housing and consumer loans over a business cycle. Newly taken housing loans exhibit a lower probability of arrears and the same applies to loans granted during the period of easy credit conditions and high real estate prices, indicating that housing credit boom has not contributed to the rise in arrears on debt. Newly taken consumer loans are related to a higher probability of arrears, suggesting that consumer loans have been used to alleviate financial difficulties.

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  • 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.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:3:p:2811-2833
    DOI: 10.1002/ijfe.2565
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