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Debt Overhang and Deleveraging in the US Household Sector: Gauging the Impact on Consumption

Listed author(s):
  • Bruno Albuquerque
  • Georgi Krustev

Using a novel dataset for the US states, this paper examines whether household debt and the protracted debt deleveraging help explain the dismal performance of US consumption since 2007, in the aftermath of the housing bubble. By separating the concepts of deleveraging and debt overhang—a flow and stock effect—we find that excessive indebtedness exerted a meaningful drag on consumption over and beyond income and wealth effects. The overall impact, however, is modest, around one-sixth of the slowdown in consumption between 2000–06 and between 2007–12—and mostly driven by states with particularly large imbalances in the household sector. This might be indicative of non-linearities, whereby indebtedness begins to bite only when misalignments from sustainable debt dynamics become more excessive.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 15-47.

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Length: 37 pages
Date of creation: 2015
Handle: RePEc:bca:bocawp:15-47
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