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The relationship of household debt and growth in the short and long run

Author

Listed:
  • Marco J. Lombardi

    (Bank for International Settlements)

  • Madhusudan Mohanty

    (Bank for International Settlements)

  • Ilhyock Shim

    (Bank for International Settlements Representative Office for Asia and the Pacific)

Abstract

Household debt levels relative to GDP have risen rapidly in many countries over the past decade. We investigate the relationship between household debt and growth by employing a novel estimation technique which helps to separate short-run from long-run relationships. Using data for 54 economies over 1990‒2016, we show that an increase in household debt is associated with higher GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio predicts lower GDP growth in the long run by 0.1 percentage point. Moreover, the negative long-run relationship between household indebtedness and GDP growth intensifies as the household debt-to-GDP ratio exceeds 70%, suggesting that policy makers are likely to face non-trivial, real costs in stimulating the economy through credit expansion.

Suggested Citation

  • Marco J. Lombardi & Madhusudan Mohanty & Ilhyock Shim, 2022. "The relationship of household debt and growth in the short and long run," Empirical Economics, Springer, vol. 63(4), pages 1887-1911, October.
    • Handle: RePEc:spr:empeco:v:63:y:2022:i:4:d:10.1007_s00181-021-02188-z
    DOI: 10.1007/s00181-021-02188-z
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    More about this item

    Keywords

    Household debt; Consumption; Cross-sectional autoregressive distributed lag model; Output growth; Threshold effect;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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