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A Short Empirical Note on Household Debt, Financialization, and Macroeconomic Performance

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  • Yun Kim

    (Department of Economics, Trinity College)

Abstract

We empirically examine the relationship between U.S. output and household debt. To account for structural change due to financial liberalization, we divide the sample at the fourth quarter of 1982. We find structural differences between earlier and later business cycles for the U.S. household sector and its relation to the macroeconomy. In the regression analysis for pre-1982, we find no evidence that the household debt variables had any negative effect on output. However, we find some evidence that the household debt variables have negative effects on output for the post-1982 period. A formal structural break test provides evidence of a structural change in the relationship of U.S. output to household debt. Unit root tests for the separate samples show that none of the household variables possesses a unit root in the earlier period, yet all of them do in the later period, indicating fundamental differences between earlier and later periods in terms of the data generating process.

Suggested Citation

  • Yun Kim, 2011. "A Short Empirical Note on Household Debt, Financialization, and Macroeconomic Performance," Working Papers 1107, Trinity College, Department of Economics.
    • Handle: RePEc:tri:wpaper:1107
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    File URL: http://www3.trincoll.edu/repec/WorkingPapers2011/WP11-07.pdf
    File Function: First version, 2011
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    References listed on IDEAS

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    1. Cynamon Barry Z. & Fazzari Steven M., 2008. "Household Debt in the Consumer Age: Source of Growth--Risk of Collapse," Capitalism and Society, De Gruyter, vol. 3(2), pages 1-32, October.
    2. Thomas I. Palley, 2013. "Financialization: What It Is and Why It Matters," Palgrave Macmillan Books, in: Financialization, chapter 2, pages 17-40, Palgrave Macmillan.
    3. Elizabeth Schmitt, 2000. "Does rising consumer debt signal future recessions?: Testing the causal relationship between consumer debt and the economy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 28(3), pages 333-345, September.
    4. Thomas I. Palley, 1994. "Debt, Aggregate Demand, and The Business Cycle: an Analysis in the Spirit of Kaldor and Minsky," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 16(3), pages 371-390, March.
    5. C. Alan Garner, 1996. "Can measures of the consumer debt burden reliably predict an economic slowdown?," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q IV), pages 63-76.
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    Cited by:

    1. D'Orazio, Paola, 2019. "Income inequality, consumer debt, and prudential regulation: An agent-based approach to study the emergence of crises and financial instability," Economic Modelling, Elsevier, vol. 82(C), pages 308-331.

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    More about this item

    Keywords

    household debt; output; financial liberalization; structural break;
    All these keywords.

    JEL classification:

    • E29 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Other
    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other

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