Determinants Of Households Debt In Euro Area Countries

Excessive household debt can have potentially large negative consequences for the macroeconomy, especially in periods of stress. This chapter analyses in detail cross-country differences in household debt developments, distinguishing between the Fischer dynamics, i.e. the automatic accumulation/decumulation of debt due to changes in interest rates and income growth, and new debt resulting from household primary deficits related to their spending choices. It further uses panel data techniques to identify possible determinants of household primary deficits in the euro area, with particular emphasis on country characteristics. According to the model, household primary deficits show some inertia, and appear related to developments in interest rates and income growth, to the accumulated stock of debt, intensions to buy a house the year before, and the ageing of the population. In terms of cross-country variation, differences in past deficits and income growth, are important to explain variations in household primary deficits across countries. Variations in the stock of debt and in effective interest rates also played a visible whole in particular periods of time. Finally, unobserved fixed effects also explain some of the variation and could be due to cultural and institutional reasons and have possible links to the justice system, homeownership rates and insolvency regimes, determining different attitudes towards debt.