Household Debt and Aggregate Consumption Expenditures
This paper shows that the debt burden of households, as measured by the debt service to income ratio, is helpful in forecasting the future growth of consumer spending. Not only is the debt-service ratio a statistically significant predictor of future spending growth, it also explains about as much of the variation in spending growth as many other commonly used indicators. And when combined with other economic indicators, the debt-service ratio still provides incremental predictive power. The debt-service ratio predicts future spending growth in part because it helps predict future income growth for borrowing-constrained households, but also because it directly affects spending growth. I argue that this direct effect reflects a tightening of lending standards by financial institutions following a rise in the debt burden of households. This direct effect is important for spending on durable goods and services, but virtually nonexistent for spending on nondurable goods. Because almost 70 percent of spending on nondurable goods represents purchases of food and clothing (which are less discretionary than purchases of durables and services), I conclude that my results are consistent with the view that borrowing-constrained households will limit their discretionary purchases when faced with a tightening of credit.
|Date of creation:||30 Oct 1997|
|Date of revision:|
|Publication status:||published as "Household Debt and Consumer Spending," Business Economics, 1998, 33, 38-42|
|Contact details of provider:|| Postal: |
Web page: http://fmwww.bc.edu/EC/Email:
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
- Campbell, John Y & Mankiw, N Gregory, 1990.
"Permanent Income, Current Income, and Consumption,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 8(3), pages 265-79, July.
- John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
- Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
- Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994.
"Does Consumer Sentiment Forecast Household Spending? If So, Why?,"
American Economic Review,
American Economic Association, vol. 84(5), pages 1397-1408, December.
- Christopher D. Carroll & Jeffery C. Fuhrer & David W. Wilcox, 1994. "RATS code for Does Consumer Sentiment Forecast Household Spending? If So, Why?," QM&RBC Codes 49, Quantitative Macroeconomics & Real Business Cycles.
- Christopher D Carroll, 1990.
"Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis,"
Economics Working Paper Archive
371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
- Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
- Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
- Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
- Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
- Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:386. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum)
If references are entirely missing, you can add them using this form.