Household Debt and Aggregate Consumption Expenditures
AbstractThis paper shows that the debt burden of households, as measured by the debt service to income ratio, is helpful in forecasting the future growth of consumer spending. Not only is the debt-service ratio a statistically significant predictor of future spending growth, it also explains about as much of the variation in spending growth as many other commonly used indicators. And when combined with other economic indicators, the debt-service ratio still provides incremental predictive power. The debt-service ratio predicts future spending growth in part because it helps predict future income growth for borrowing-constrained households, but also because it directly affects spending growth. I argue that this direct effect reflects a tightening of lending standards by financial institutions following a rise in the debt burden of households. This direct effect is important for spending on durable goods and services, but virtually nonexistent for spending on nondurable goods. Because almost 70 percent of spending on nondurable goods represents purchases of food and clothing (which are less discretionary than purchases of durables and services), I conclude that my results are consistent with the view that borrowing-constrained households will limit their discretionary purchases when faced with a tightening of credit.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 386.
Length: 24 pages
Date of creation: 30 Oct 1997
Date of revision:
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
Household Debt; Consumer Spending; Debt Service;
Find related papers by JEL classification:
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
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