Household leverage and consumption during the Great Depression

Purpose - The purpose of this study is to explore the impact of household leverage on consumption in Denmark during the Great Depression in the 1930s. Design/methodology/approach - A range of consumption functions are estimated on the basis of household-level data from the Expenditure and Saving Survey of 1931. Findings - The estimations show significant negative marginal effects of various measures of leverage on homeowners’ non-durable consumption. The magnitude of the estimated effects suggests that leverage contributed significantly to the economic downturn during the Great Depression by depressing consumer spending of homeowners. Practical implications - Gross debt levels of homeowners are not only of direct importance for financial stability but also have implications for macroeconomic stability, which again might affect the stability of the financial system. These findings seem to be in line with the focus on household leverage in the macroprudential oversight performed by regulators and central banks in many countries. Originality/value - This paper is the first study of the leverage channel in the private consumption function using household micro data from the Great Depression.