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Household Debt and Aggregate Consumption Expenditures

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  • Robert G. Murphy

    () (Boston College)

Abstract

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.

Suggested Citation

  • Robert G. Murphy, 1997. "Household Debt and Aggregate Consumption Expenditures," Boston College Working Papers in Economics 386, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:386
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    File URL: http://fmwww.bc.edu/EC-P/wp386.pdf
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    References listed on IDEAS

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    1. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
    2. 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 971-987, December.
    3. 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.
    4. 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.
    5. 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 265-279, July.
    6. 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.).
    7. Lusardi, Annamaria, 1998. "On the Importance of the Precautionary Saving Motive," American Economic Review, American Economic Association, vol. 88(2), pages 449-453, May.
    8. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
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    Citations

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    Cited by:

    1. Kukk, Merike, 2016. "How did household indebtedness hamper consumption during the recession? Evidence from micro data," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 764-786.
    2. John Muellbauer & Emilio Fernandez-Corugedo, 2004. "Consumer credit conditions in the UK," Money Macro and Finance (MMF) Research Group Conference 2003 70, Money Macro and Finance Research Group.
    3. Emilio Fernandez-Corugedo & John Muellbauer, 2006. "Consumer credit conditions in the United Kingdom," Bank of England working papers 314, Bank of England.
    4. Andrew Kish, 2006. "Perspectives on recent trends in consumer debt," Payment Cards Center Discussion Paper 06-05, Federal Reserve Bank of Philadelphia.

    More about this item

    Keywords

    Household Debt; Consumer Spending; Debt Service;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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