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Does consumer debt cause economic recession? Evidence using directed acyclic graphs

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  • Jin Zhang
  • David Bessler
  • David Leatham

Abstract

This study investigates the relationship between consumer debt and aggregate economic activity based on time series methods and directed acyclic graphs (DAG). Quarterly US data, measured over the period 1980 to 2003, on consumer debt, gross domestic product (GDP), interest rates, housing starts, and domestic auto sales, are analysed in an Error Correction Model (ECM). Contemporaneous innovations from this ECM are given a structural representation, using recent developments in DAG modelling. The ECM and DAG components are summarized using innovation accounting techniques (impulse response functions and forecast error variance decomposition). The DAG causal pattern reveals a causal flow from GDP to consumer debt; the subsequent innovation accounting results also show that consumer debt is not exogenous in contrast to GDP and other indicators. This result concurs with a previous study based on Granger causality, but contradicts other works that claim consumer debt is a root cause of aggregate economic performance.

Suggested Citation

  • Jin Zhang & David Bessler & David Leatham, 2006. "Does consumer debt cause economic recession? Evidence using directed acyclic graphs," Applied Economics Letters, Taylor & Francis Journals, vol. 13(7), pages 401-407.
  • Handle: RePEc:taf:apeclt:v:13:y:2006:i:7:p:401-407
    DOI: 10.1080/13504850500398658
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    References listed on IDEAS

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    1. Matiur Rahman & Muhammad Mustafa, 1997. "Growths in US housing starts, real consumer debt, real GDP and the long-term real interest rate: a vector cointegration analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 4(12), pages 757-759.
    2. Bessler, David A. & Yang, Jian, 2003. "The structure of interdependence in international stock markets," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 261-287, April.
    3. Oral Williams & David Bessler, 1997. "Cointegration: implications for the market efficiencies of the high fructose corn syrup and refined sugar markets," Applied Economics, Taylor & Francis Journals, vol. 29(2), pages 225-232.
    4. K. J. Kowalewski, 1986. "Is the consumer overextended?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
    5. Selva Demiralp & Kevin D. Hoover, 2003. "Searching for the Causal Structure of a Vector Autoregression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 745-767, December.
    6. C. Alan Garner, 1996. "Can measures of the consumer debt burden reliably predict an economic slowdown?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 63-76.
    7. Swanson, N.R. & Granger, C.W.J., 1994. "Impulse Response Functions Based on Causal Approach to Residual Orthogonalization in Vector Autoregressions," Papers 9-94-1, Pennsylvania State - Department of Economics.
    8. Elizabeth Schmitt, 2000. "Does rising consumer debt signal future recessions?: Testing the causal relationship between consumer debt and the economy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 28(3), pages 333-345, September.
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    Cited by:

    1. Sumei Tang & E. A. Selvanathan & S. Selvanathan, 2008. "Foreign Direct Investment, Domestic Investment and Economic Growth in China: A Time Series Analysis," The World Economy, Wiley Blackwell, vol. 31(10), pages 1292-1309, October.
    2. repec:nea:journl:y:2017:i:36:p:12-30 is not listed on IDEAS

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