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Nonlinear Effect of Household Debt on Consumption: Evidence from Household-level Panel Data in Korea

Author

Listed:
  • Youngjoo Choi

    (Monetary Policy Department, the Bank of Korea)

  • Jong Chil Son

    (Division of Economics, Hankuk University of Foreign Studies)

Abstract

This paper attempts to answer the question of whether there exist thresholds for two household debt ratios, debt-to-disposable income and debt service ratios, beyond which consumption can be hampered by an additional increase in the ratios, using household-level panel data from 2000 to 2014 in Korea. The results of the panel estimation indicate that households begin to reduce their consumption spending when the debt-to-disposable income ratio exceeds 210% of their disposable income or when the debt service ratio exceeds 27% of their disposable income. In addition, the nonlinear effects become less significant in the estimations for consumption growth. Finally, the estimation results for consumption level according to sub-income groups indicate that the nonlinear effects of debt service ratio are more significant for higher income groups while the estimated threshold for the ratio is smaller for lower income households.

Suggested Citation

  • Youngjoo Choi & Jong Chil Son, 2016. "Nonlinear Effect of Household Debt on Consumption: Evidence from Household-level Panel Data in Korea," Economics Bulletin, AccessEcon, vol. 36(2), pages 1083-1094.
    • Handle: RePEc:ebl:ecbull:eb-15-00389
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    References listed on IDEAS

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    Cited by:

    1. Mathias Drehmann & Mikael Juselius & Sarah Quincy, 2024. "Aggregate Debt Servicing and the Limit on Private Credit," NBER Working Papers 33306, National Bureau of Economic Research, Inc.
    2. Jong Chil Son & Hail Park, 2019. "U.S. Interest Rate and Household Debt Sustainability: The Case of Korea," Sustainability, MDPI, vol. 11(14), pages 1-16, July.

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    Keywords

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D1 - Microeconomics - - Household Behavior

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