Modeling of household economic security

The global economic and financial crisis (2008-2009) showed that growing sectoral imbalances (for example, too much housing investment) and financial risks (for instance,excessively leveraged financial institutions, excess household indebtedness, excess maturity mismatches in the banking system, recourse to off-balance-sheet products entailing large tail risks) ultimately led to the severe recession. The monetary policy rate was not a proper tool to deal with the kind of imbalances. More-targeted macroprudential tools should be used for that task. These tools can be classified into three categories: (1) tools influenced lenders’ behavior, such as cyclical capital requirements, leverage ratios, or dynamic provisioning; (2) tools focusing on borrowers’ behavior, such as ceilings on loan- to-value ratios (LTVs) or on debt-to-income ratios (DTIs); and (3) capital flow management tools (Blanchard, Dell'Ariccia, Mauro, 2013, p. 18). Focusing on loan-to-value (LTV) and debt-to-income (DTI) ratios, limits on LTV and DTI are aimed to prevent excess household indebtedness. Growing vulnerabilities on borrower side could lead to bankruptcies and foreclosures and finally to macroeconomic busts. However, implementation of LTV and DTI may be linked with significant costs. When the limits are not appropriate, their use may create expansion of credit by nonbanks, less-regulated financial institutions or stimulate political opposition, ( for example, young households may strongly object to a decrease in the maximum LTV). Introducing macroprudential tools focusing on borrowers’ behavior requires information on economic security of households and its sensibility to different dimensions. In the paper economic security of households is defined as the ability to achieve income necessary for covering household needs at its suitable level and to create financial reserves to be at disposal in case of unfavorable accidence (sickness, job loss, family breakdown). The purpose of the paper is to build a structural equation model (SEM) in which economic security of households is a main endogenous concept. The detailed objectives: • to verify hypotheses on relationships between concepts used in the model; • to evaluate the relevance of different economic security dimensions (identified both as latent variables and measured variables); • to measure economic security (an index of household economic security); • to define criterion for considering the family secure or insecure; • to simulate the impact of changes in economic security dimensions (including household indebtedness) on the economic security index. Economic security of households is described by: 3) its latent dimensions, like: income stability; propensity to save; propensity to borrow; loan burden; financial survival (abilities to survive in a critical financial situation); propensity to insure; wealth (real estate); heritage (parents’ wealth, educational level of parents); burden of chronic illness; and 4) its measured variables, like: income level; level of savings; level of debts. The latent dimensions of economic security are estimated in the model from the 54 scale items in the questionnaire, each of which is predicted to “tap into'” the latent variables. The paper uses the data from the questionnaire survey carried out across households in Poland in 2013 by the professional polling agency. The whole sample (N=1082 households) is broken into two sub-samples to represent “young” households (N=399) and “older” households (N=683). Exploratory factor analysis and confirmatory factor analysis are applied to estimate the SEM. The model is estimated separately for “young” households (a head in age between 18 and 39) and “older” ones ( a head in age of 40 and more) to identify differences and similarities in dimensions of economic security for these two groups. Findings should be useful directly for macroprudential policy as well as indirectly for monetary policy.