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Financial deregulation and household indebtedness

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Low saving rates and high indebtedness are characteristics of the household sector in many developed countries. As in other countries, financial deregulation has contributed to increased household indebtedness in New Zealand. This paper discusses several aspects of the linkages between deregulation and household consumption decisions. It begins with an overview of the financial sector reforms and a discussion of how the reforms affected households' access to credit. Secondly, the effect of a change in house prices on consumption is measured. Given that New Zealanders hold about 80 per cent of their wealth in housing, changes in house prices have the potential to materially affect household consumption decisions. Also, there is evidence that the effect of changes in housing wealth on consumption is stronger in the period after deregulation. Thirdly, the role of the household sector in the current account is discussed as banks have increasingly been borrowing overseas to fund household borrowing. The results indicate that the household sector's net overseas surplus declined by at least $7 billion over the last decade. Finaly, the ability of the household sector to weather an economic downturn is considered. Highly leveraged households are more vulnerable in times of stress, and their debt servicing capabilities might deteriorate when interest rates rise. Also, deterioration in household balance sheets could negatively impact the financial sector.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2003/01.

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Length: 28p
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:nzb:nzbdps:2003/01

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  1. Jonathan A. Parker, 2000. "Spendthrift in America? On Two Decades of Decline in the U.S. Saving Rate," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 317-387 National Bureau of Economic Research, Inc.
  2. Clive Thorp, 2002. "Developments in credit markets over two decades," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, June.
  3. Michael Reddell & Ian Woolford & Sean Comber, 2001. "International capital flows, external debt, and New Zealand financial stability," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, December.
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Cited by:
  1. Trinh Le, 2007. "Does New Zealand have a household saving crisis?," Macroeconomics Working Papers 23081, East Asian Bureau of Economic Research.
  2. Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Computing in Economics and Finance 2005 120, Society for Computational Economics.
  3. Sarah Drought & Chris McDonald, 2011. "Forecasting house price inflation: a model combination approach," Reserve Bank of New Zealand Discussion Paper Series DP2011/07, Reserve Bank of New Zealand.
  4. Caterina Mendicino, 2006. "Credit Market and Macroeconomic Volatility," 2006 Meeting Papers 317, Society for Economic Dynamics.
  5. Khoon Goh, 2005. "Savings and the household balance sheet," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, June.
  6. Maxime Desmarais-Tremblay & François Vaillancourt, 2011. "Le bilan des particuliers au Canada : évolution et analyse," CIRANO Project Reports 2011rp-17, CIRANO.
  7. Mark Smith, 2010. "Evaluating household expenditures and their relationship with house prices at the microeconomic level," Reserve Bank of New Zealand Discussion Paper Series DP2010/01, Reserve Bank of New Zealand.
  8. Reserve Bank of New Zealand, 2011. "Submission to the Productivity Commission inquiry on housing affordability," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 74, pages 30-38, September.
  9. Mark van Zijll de Jong & Grant M. Scobie, 2006. "Housing: An Analysis of Ownership and Investment Based on the Household Savings Survey," Treasury Working Paper Series 06/07, New Zealand Treasury.
  10. Trinh Le & John Gibson & Steven Stillman, 2010. "Household Wealth and Saving in New Zealand: Evidence from the Longitudinal Survey of Family, Income and Employment," Working Papers 10_06, Motu Economic and Public Policy Research.
  11. Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
  12. David Law & Lisa Meehan & Grant M Scobie, 2011. "KiwiSaver: An Initial Evaluation of the Impact on Retirement Saving," Treasury Working Paper Series 11/04, New Zealand Treasury.
  13. Nicolae Dardac & Iustina Boitan, 2009. "The Impact Of Household Sector Risks To The Soundness Of The Romanian Banking System," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 59.

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