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The rise in U.S. household indebtedness: causes and consequences

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Author Info
Karen E. Dynan
Donald L. Kohn
Abstract

The ratio of total household debt to aggregate personal income in the United States has risen from an average of 0.6 in the 1980s to an average of 1.0 so far this decade. In this paper we explore the causes and consequences of this dramatic increase. Demographic shifts, house price increases, and financial innovation all appear to have contributed to the rise. Households have become more exposed to shocks to asset prices through the greater leverage in their balance sheets, and more exposed to unexpected changes in income and interest rates because of higher debt payments relative to income. At the same time, an increase in access to credit and higher levels of assets should give households, on average, a greater ability to smooth through shocks. We conclude by discussing some of the risks associated with some households having become very highly indebted relative to their assets.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-37.

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Date of creation: 2007
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Handle: RePEc:fip:fedgfe:2007-37

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Keywords: Consumer credit ; Debt - United States;

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  2. Karen Dynan & Kathleen Johnson & Karen Pence, 2003. "Recent changes to a measure of U.S. household debt service," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 417-426. [Downloadable!]
  3. Karen M. Pence, 2002. "Nature or nurture: why do 401(k) participants save differently than other workers?," Finance and Economics Discussion Series 2002-33, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Rothberg, James P & Nothaft, Frank E & Gabriel, Stuart A, 1989. "On the Determinants of Yield Spreads between Mortgage Pass-Through and Treasury Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 301-15, December.
  7. Christopher D Carroll & Wendy E Dunn, 1997. "Unemployment Expectations Jumping (Ss) Triggers and Household Balance Sheets," Economics Working Paper Archive 386, The Johns Hopkins University,Department of Economics.
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  8. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Glenn Canner & Karen Dynan & Wayne Passmore, 2002. "Mortgage refinancing in 2001 and early 2002," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 469-481. [Downloadable!]
  10. Gene Amromin & Jennifer Huang & Clemens Sialm, 2006. "The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings," NBER Working Papers 12502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Alan Greenspan & James Kennedy, 2007. "Sources and uses of equity extracted from homes," Finance and Economics Discussion Series 2007-20, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Kristopher Gerardi & Harvey S. Rosen & Paul Willen, 2007. "Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market," NBER Working Papers 12967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January. [Downloadable!] (restricted)
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  15. David A. Love & Paul A. Smith & Lucy C. McNair, 2007. "Do households have enough wealth for retirement?," Finance and Economics Discussion Series 2007-17, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  16. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August. [Downloadable!] (restricted)
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  17. Kristopher Gerardi & Harvey S. Rosen & Paul Willen, 2006. "Do households benefit from financial deregulation and innovation?: the case of the mortgage market," Public Policy Discussion Paper 06-6, Federal Reserve Bank of Boston. [Downloadable!]
  18. Eric M. Engen & William G. Gale & Cori Uccello, 2004. "Lifetime Earnings, Social Security Benefits, And The Adequacy Of Retirement Wealth Accumulation," Working Papers, Center for Retirement Research at Boston College 2004-10, Center for Retirement Research. [Downloadable!]
  19. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September. [Downloadable!] (restricted)
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  20. repec:bep:eaptop:v:7:y:2007:i:1:p:1411-1411 is not listed on IDEAS
  21. repec:bep:macadv:v:5:y:2005:i:1:p:1235-1235 is not listed on IDEAS
  22. Kathleen W. Johnson & Geng Li, 2007. "Do high debt payments hinder household consumption smoothing?," Finance and Economics Discussion Series 2007-52, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  23. Edelberg, Wendy, 2006. "Risk-based pricing of interest rates for consumer loans," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2283-2298, November. [Downloadable!] (restricted)
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