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Modigliani Meets Minsky: American Household Debt, 1949-2016

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Abstract

Using seven decades of household level micro data, this paper makes the first systematic attempt to explain the household debt boom in postwar America. We document major changes in life-cycle profiles of household debt and loan-to-value ratios, driven mainly by housing debt. At the same time, home equity profiles remained constant across cohorts. We show that standard life-cycle savings behavior can explain a substantial part of the debt increase in a macroeconomic environment where house prices increase. Older households increase debt to remain on their targeted life-cycle wealth trajectories, while younger households have to take on more debt to purchase more expensive homes. Although net housing wealth remains constant, the extension of balance sheets endogenously leads to rising fragility and makes the economy highly sensitive to house price fluctuations.

Suggested Citation

  • Alina K. Bartscher & Moritz Kuhn & Moritz Schularick, 2018. "Modigliani Meets Minsky: American Household Debt, 1949-2016," Community Development Publications and Reports, Federal Reserve Bank of St. Louis, pages 1-67, October.
    • Handle: RePEc:fip:l00101:103215
    Note: The St. Louis Fed Center for Household Financial Stability and the Private Debt Project hosted three "Tipping Points" Household Debt Research Symposia, 2016-2018. All three sessions were centered on the question of "tipping points" in regard to debt: How and when does household debt move from being wealth-building and productive for households and the economy to being wealth-depleting and destructive for both?; Conference Materials: https://fraser.stlouisfed.org/title/tipping-points-iii-debt-financed-homeownership-evolution-impact-future-9374/session-list-685757; Conference Executive Summary: https://fraser.stlouisfed.org/title/tipping-points-iii-debt-financed-homeownership-evolution-impact-future-9374/executive-summary-685758; Tipping Points Conference Series: https://fraser.stlouisfed.org/series/tipping-points-conference-series-9375
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