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Household resilience to expenditure and debt service channels under current inflationary conditions

Author

Listed:
  • Adhikari, Tamanna

    (Central Bank of Ireland)

  • Yao, Fang

    (Central Bank of Ireland)

Abstract

This Note uses household survey data to estimate distress rates in Ireland based on a financial margin approach. We explore the role of both the expenditure and debt service channels in determining household borrowers’ financial distress. In our baseline scenario, where inflation is expected to gradually recede, nominal income growth remains robust and unemployment does not increase, we find the debt-servicing channel to be more important than the expenditure channel in explaining the increase in distress amongst mortgaged households. Under this scenario to the end of this year, distress rates are modelled to increase only from 8.3 to 9.6 per cent. The distress rate is modelled to increase to 12.7 per cent under our most severe adverse scenario, which incorporates higher inflation, higher interest rates and a significant increase in unemployment. The increase in distress is disproportionately concentrated amongst low-income and high debt cohorts as well as borrowers with tracker loans.

Suggested Citation

  • Adhikari, Tamanna & Yao, Fang, 2023. "Household resilience to expenditure and debt service channels under current inflationary conditions," Financial Stability Notes 3/FS/23, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:3/fs/23
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    File URL: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/household-resilience-expenditure-and-debt-service-channels-under-current-inflationary-conditions.pdf?sfvrsn=29b7991d_9
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    References listed on IDEAS

    as
    1. Mr. Marco Gross & Mr. Thierry Tressel & Xiaodan Ding & Eugen Tereanu, 2022. "What Drives Mortgage Default Risk in Europe and the U.S.?," IMF Working Papers 2022/065, International Monetary Fund.
    2. Arrigoni, Simone & Boyd, Laura & McIndoe-Calder, Tara, 2022. "Household Economic Resilience," Quarterly Bulletin Articles, Central Bank of Ireland, pages 88-113, October.
    3. Joseph N. Luchman, 2021. "Determining relative importance in Stata using dominance analysis: domin and domme," Stata Journal, StataCorp LLC, vol. 21(2), pages 510-538, June.
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    Cited by:

    1. Adhikari, Tamanna & McGeever, Niall, 2023. "How resilient are Irish SMEs to input cost inflation?," Financial Stability Notes 6/FS/23, Central Bank of Ireland.

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