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The rise in US household debt: assessing its causes and sustainability

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  • Sebastian Barnes
  • Garry Young

Abstract

In this paper the causes of the rise in US household debt since the early 1970s are considered, using a calibrated partial equilibrium overlapping generations model. The model explains indebtedness in terms of a consumption-income motive, associated with consumption smoothing, and a housing-finance motive. A credit constraint on borrowing by the old is also introduced to explain why they do not borrow to finance homeownership late in life. Shocks to real interest rates and income growth expectations, combined with demographic changes, are considered to explain the rise in US household debt. The calibrated model is found to be able to explain many features of US household borrowing, both in aggregate and cross-section. In particular, it predicts that the debt to income ratio would have increased substantially during the 1990s and would be expected to continue to grow in coming years. However, the model is unable to account for rising indebtedness during the 1980s when high interest rates, lower income growth and an ageing population would have tended to reduce aggregate borrowing. Alternative explanations, possibly associated with financial liberalisation, may account for borrowing growth during that period.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 206.

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Date of creation: Nov 2003
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Handle: RePEc:boe:boeewp:206

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Citations

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Cited by:
  1. Merxe Tudela & Garry Young, 2005. "The determinants of household debt and balance sheets in the United Kingdom," Bank of England working papers 266, Bank of England.
  2. Rinaldi, Laura & Sanchis-Arellano, Alicia, 2006. "Household debt sustainability: what explains household non-performing loans? An empirical analysis," Working Paper Series 0570, European Central Bank.
  3. Yunyong Thaicharoen & Kiatipong Ariyapruchya & Titima Chucherd, 2004. "Rising Thai Household Debt: Assessing Risks and Policy Implications," Working Papers 2004-01, Economic Research Department, Bank of Thailand.
  4. Winfried Koeniger & Thomas Hintermaier, 2007. "Incomplete Markets and the Evolution of US Consumer Debt," 2007 Meeting Papers 256, Society for Economic Dynamics.
  5. Christopher Kent & Crystal Ossolinski & Luke Willard, 2007. "The Rise of Household Indebtedness," RBA Annual Conference Volume, in: Christopher Kent & Jeremy Lawson (ed.), The Structure and Resilience of the Financial System Reserve Bank of Australia.
  6. Guy Debelle, 2004. "Household debt and the macroeconomy," BIS Quarterly Review, Bank for International Settlements, March.
  7. Markus Christen & Ruskin Morgan, 2005. "Keeping Up With the Joneses: Analyzing the Effect of Income Inequality on Consumer Borrowing," Quantitative Marketing and Economics, Springer, vol. 3(2), pages 145-173, June.
  8. Andrew Kish, 2006. "Perspectives on recent trends in consumer debt," Payment Cards Center Discussion Paper 06-05, Federal Reserve Bank of Philadelphia.
  9. Umar Faruqui, 2007. "Are there significant disparities in debt burden across Canadian households? An examination of the distribution of the debt service ratio using micro-data," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring the financial position of the household sector", Basel, 30-31 August 2006 - Volume 2, volume 26, pages 249-269 Bank for International Settlements.
  10. Guy Debelle, 2004. "Macroeconomic implications of rising household debt," BIS Working Papers 153, Bank for International Settlements.
  11. Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Money Macro and Finance (MMF) Research Group Conference 2005 74, Money Macro and Finance Research Group.
  12. Michael D. Carr & Arjun Jayadev, 2013. "Relative Income and Indebtedness: Evidence from Panel Data," Working Papers 15, University of Massachusetts Boston, Economics Department.
  13. Ansgar Belke & Marcel Wiedmann, 2005. "Boom or Bubble in the US Real Estate Market?," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 260/2005, Department of Economics, University of Hohenheim, Germany.
  14. Jörg Bibow, 2010. "Alternative Strategien der Budgetkonsolidierung in Österreich nach der Rezession," IMK Studies 03-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  15. Gerhard Illing, 2004. "Geldpolitik in den USA - die Fed in der Zinsfalle?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 57(06), pages 31-37, 03.

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