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The Macroeconomic Implications of Household Debt: An Empirical Analysis

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  • Yun Kim

    ()
    (Department of Economics, Trinity College)

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    Abstract

    Multi-equation econometric frameworks are used to investigate the impact of household debt on aggregate performance in US. In the vector autoregression analysis capturing the transitory feedback effects, we observe a bidirectional positive feedback process between aggregate income and debt. According to the estimation of vector error correction models, there are negative long-run relationships between household debt and output. The empirical model has also been extended to include investment and corporate debt. The results are in contrast with the results of empirical model without corporate sector variables. The negative long-run relationship between household debt and GDP ceases to exist as shown by the positive cointegrating coefficients in the cointegrating equations. Impulse response functions from these extended empirical models also indicate that investment may be an important channel through which household debt affects output.

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    File URL: http://internet2.trincoll.edu/repec/WorkingPapers2011/wp11-03.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1103.

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    Length: 73 pages
    Date of creation: May 2011
    Date of revision:
    Handle: RePEc:tri:wpaper:1103

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    Related research

    Keywords: Household Debt; Financial Instability Hypothesis; Cointegration; VAR; VECM;

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