Fisher Dynamics in Household Debt: The Case of the U.S. 1929-2011
AbstractWe examine the importance of what we term ‘Fisher dynamics’- the mechanical e?ects of changes in interest rates, growth rates and in?ation rates on debt levels independent of borrowing -for the evolution of household debt in the U.S. over a long time horizon (1929- 2011). Adapting a standard decomposition of public debt to household sector debt, we show that these factors have been important in explaining rising debt levels, especially in the past thirty years. We identify and describe three broad regimes in the growth of household debt and several shorter episodes, distinguished by the distinct roles played Fisher dynamics and borrowing behavior in the evolution of household debt. We then provide some counterfactual trajectories of debt burdens that suggest how important ?nancial changes beginning around 1980 have been in contributing to household debt, independent of any changes in household behavior. Speci?cally, if average rates of growth, in?ation and interest remained the same after 1980 as before 1980, household debt burdens in 2011 would have been roughly the same as they were in the early 1950s, despite the sharp increase in borrowing in the early 2000s. We then discuss the di?culties involved in deleveraging. Under scenarios involving even substantial reductions in household expenditure, returning to debt levels of the 1980s could take decades. If lower private leverage is a condition of acceptable growth,then in the absence of a substantial fall in interest rates relative to growth rates, large-scale debt forgiveness of some form may be unavoidable.
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Bibliographic InfoPaper provided by University of Massachusetts Boston, Economics Department in its series Working Papers with number 13.
Length: 31 Pages
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Debt; Crisis; Leverage; Deleveraging; Interest; Inflation; Fisher;
Find related papers by JEL classification:
- D19 - Microeconomics - - Household Behavior - - - Other
- G0 - Financial Economics - - General
- G01 - Financial Economics - - General - - - Financial Crises
- H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
- H69 - Public Economics - - National Budget, Deficit, and Debt - - - Other
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Persnickety followups on inequality and demand
by Steve Randy Waldman in Interfluidity on 2013-02-12 23:08:43
- Followup on Inequality & Demand
by Guest Author in The Big Picture on 2013-02-16 16:00:30
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