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Household debt sustainability - What explains household non-performing loans? An empirical analysis

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Author Info
Laura Rinaldi () (University of Leuven, Research Center of International Economics, Naamsestraat 69, B-3000 Leuven, Belgium)
Alicia Sanchis-Arellano () (Bank of Spain, Alcalá 50, E-28014 Madrid, Spain)
Abstract

Sound household financial conditions are relevant for both financial and monetary stability. Therefore, we analyse household financial fragility in a sample of euro area countries with the aim to shed some light on the nature of the large debt increase accumulated in recent years. We focus on household arrears on payment obligations, which are one of the most direct measures of financial stress of the sector. The probability of falling into arrears is derived from a life-cycle type of model and is investigated empirically using a cross-section and time series approach. We analyse cointegration and model arrears within an errorcorrection framework. The results suggest that the financial conditions of households might become more vulnerable to adverse shocks in their income and wealth. JEL Classification: C23; G21; D14.

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Paper provided by European Central Bank in its series Working Paper Series with number 570.

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Length: 43 pages
Date of creation: Jan 2006
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Handle: RePEc:ecb:ecbwps:20060570

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Keywords: Panel cointegration; non-performing loans; household debt sustainability; default.;

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