Household debt: supply-driven sugar rushes

Household debt as a ratio to gross domestic product (GDP) has been on the rise in many economies during the past decade. In Asia, the People's Republic of China (PRC), the Republic of Korea, Malaysia, and Thailand have had the most rapid growth. This chapter shows that an increase in household debt initially raises real GDP, but the increase is very short-lived, as real GDP begins to decline after 1 year, indicating that elevated household debt is a precursor of economic recessions. A closer look at micro-level household survey data shows that low-income households in the Republic of Korea are more likely to default and are highly sensitive to income changes, whereas PRC households at all income levels show a higher probability of default. Although policy makers and regulators have been actively involved in monitoring and supervising household debt, many economies in the Asian region still need well-structured and coordinated policies. Coordinated fiscal, monetary, and macroprudential policies could help reduce the risk of financial instability that arises from large household debt by improving the quality of private debt.