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The Effect of Household Debt on Aggregate Demand - The Case of Spain

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  • Sebastian Jauch
  • Sebastian Watzka

Abstract

Households in some European countries increased their indebtedness massively over the past 20 years. Besides household debt, also government debt and corporate debt are in some countries at levels not seen before. While there is a common agreement that these high debt levels are not sustainable there is fewer consensus about the effect of changes in debt and especially debt levels on aggregate demand. Based on a cross country study of 18 European countries we show that there is a strong link between household sector debt and aggregate demand. We strengthen these results by an analysis for Spanish provinces. The level of household debt in the Spanish provinces is highly significant for changes in aggregate demand that translated into increasing unemployment in these regions during the recession following the financial crisis of 2007/08. We find that on aggregate about 1/3 of the increase in Spanish unemployment can be traced back to high household debt levels.

Suggested Citation

  • Sebastian Jauch & Sebastian Watzka, 2012. "The Effect of Household Debt on Aggregate Demand - The Case of Spain," CESifo Working Paper Series 3924, CESifo.
    • Handle: RePEc:ces:ceswps:_3924
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    References listed on IDEAS

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    1. Steve Keen, 2009. "Household Debt: The Final Stage in an Artificially Extended Ponzi Bubble," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(3), pages 347-357, September.
    2. Atif R. Mian & Amir Sufi, 2012. "What explains high unemployment? The aggregate demand channel," NBER Working Papers 17830, National Bureau of Economic Research, Inc.
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    Cited by:

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    3. Guo Xie & Kai Li, 2023. "Does resident leverage volatility affect corporate profitability?: An empirical study from Chinese A‐share listed companies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1656-1668, April.
    4. Patience Nkala & Asrat Tsegaye, 2017. "The Relationship between Household Debt and Consumption Spending in South Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 9(2), pages 243-257.

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    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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