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Household debt and spending in the United Kingdom

Author

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  • Bunn, Philip

    () (Bank of England)

  • Rostom, May

    () (Bank of England)

Abstract

Household debt rose sharply in the United Kingdom in the decade before the financial crisis. This paper uses household level microdata to investigate the relationship between mortgage debt and consumption. We find evidence that more highly indebted groups of households made larger cuts in spending following the financial crisis: spending cuts associated with debt may have reduced the level of aggregate private consumption by up to 2% after 2007. Survey data suggest that large cuts in spending by indebted households after 2007 may reflect a combination of tighter credit conditions and increased concerns about ability to make future debt repayments. The potential for household indebtedness to lead to large adverse impacts on aggregate demand was an important reason why the Bank of England’s Financial Policy Committee took policy action at its June 2014 meeting.

Suggested Citation

  • Bunn, Philip & Rostom, May, 2015. "Household debt and spending in the United Kingdom," Bank of England working papers 554, Bank of England.
  • Handle: RePEc:boe:boeewp:0554
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Atif Mian & Amir Sufi, 2018. "Finance and Business Cycles: The Credit-Driven Household Demand Channel," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 31-58, Summer.
    2. Anna Zabai, 2017. "Household debt: recent developments and challenges," BIS Quarterly Review, Bank for International Settlements, December.
    3. Bridges, Jonathan & Jackson, Christopher & McGregor, Daisy, 2017. "Down in the slumps: the role of credit in five decades of recessions," Bank of England working papers 659, Bank of England.
    4. Bracke, Philippe & Tenreyro, Silvana, 2016. "History dependence in the housing market," LSE Research Online Documents on Economics 86176, London School of Economics and Political Science, LSE Library.
    5. Mcknight, Abigail, 2019. "Understanding the relationship between poverty, inequality and growth: a review of existing evidence," LSE Research Online Documents on Economics 103458, London School of Economics and Political Science, LSE Library.
    6. Rutger Teulings & Bram Wouterse & Kan Ji, 2019. "Disentangling the effect of household debt on consumption," CPB Discussion Paper 395.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    7. John Simon & Tahlee Stone, 2017. "The Property Ladder after the Financial Crisis: The First Step is a Stretch but Those Who Make It Are Doing OK," RBA Research Discussion Papers rdp2017-05, Reserve Bank of Australia.
    8. Aikman, David & Haldane, Andrew & Hinterschweiger, Marc & Kapadia, Sujit, 2018. "Rethinking financial stability," Bank of England working papers 712, Bank of England.
    9. David Aikman & Jonathan Bridges & Anil Kashyap & Caspar Siegert, 2019. "Would Macroprudential Regulation Have Prevented the Last Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 33(1), pages 107-130, Winter.
    10. Voinea, L. & Lovin, H. & Cojocaru, A., 2018. "The impact of inequality on the transmission of monetary policy," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 236-250.
    11. Fiona Price & Benjamin Beckers & Gianni La Cava, 2019. "The Effect of Mortgage Debt on Consumer Spending: Evidence from Household-level Data," RBA Research Discussion Papers rdp2019-06, Reserve Bank of Australia.
    12. Abigail McKnight, 2019. "Understanding the relationship between poverty, inequality and growth: a review of existing evidence," CASE Papers /216, Centre for Analysis of Social Exclusion, LSE.
    13. Cumming, Fergus, 2018. "Mortgages, cash-flow shocks and local employment," Bank of England working papers 773, Bank of England.

    More about this item

    Keywords

    Household spending; debt;

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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