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

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  • Bruno Albuquerque
  • Georgi Krustev

Abstract

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.

Suggested Citation

  • Bruno Albuquerque & Georgi Krustev, 2015. "Debt Overhang and Deleveraging in the US Household Sector: Gauging the Impact on Consumption," Staff Working Papers 15-47, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-47
    DOI: 10.34989/swp-2015-47
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    Keywords

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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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