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Do households with debt cut back their consumption more in response to shocks?

Author

Listed:
  • Faisanos, Apostolos

    (Brunel)

  • Lydon, Reamonn

    (Central Bank of Ireland)

Abstract

We investigate whether household indebtedness affects the response of consumer spending to income and wealth changes. We construct a novel estimate of spending on non-durables to track an unbalanced panel of households between 1993 and 2017. Using this data, we explore how household indebtedness amplifies the response of consumer spending to changes in income and wealth. We assess whether negative and positive shocks imply the same consumption adjustments and whether such mechanism is crisis-specific. Our results indicate that falls in income trigger substantially larger adjustments in consumption than income rises for households with debt, while the findings for wealth are less conclusive. The effects are strongest for households with larger debt-service and debt-to income ratios. These effects are not specific to the financial crisis period.

Suggested Citation

  • Faisanos, Apostolos & Lydon, Reamonn, 2021. "Do households with debt cut back their consumption more in response to shocks?," Research Technical Papers 8/RT/21, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:8/rt/21
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/08rt21-do-households-with-debt-cut-back-consumption-more-in-response-to-shocks.pdf?sfvrsn=12
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    Cited by:

    1. Sala, Hector & Trivín, Pedro, 2022. "Family Finances and Debt Overhang: Evolving Consumption Patterns of Spanish Households," IZA Discussion Papers 15222, Institute of Labor Economics (IZA).

    More about this item

    Keywords

    Consumption; Debt; Income; Wealth;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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