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Debt overhang and deleveraging in the US household sector: gauging the impact on consumption

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  • Albuquerque, Bruno
  • Krustev, Georgi

Abstract

Using a novel dataset for the US states, this paper examines whether household debt and the protracted debt deleveraging help explain the dismal performance of US consumption since 2007 in the aftermath of the housing bubble. By separating the concepts of deleveraging and debt overhang - a flow and a stock effect - we find that excessive indebtedness exerted a meaningful drag on consumption over and beyond income and wealth effects. The overall impact, however, is modest - around one-sixth of the slowdown in consumption between 2000-06 and 2007-12 - and mostly driven by states with particularly large imbalances in their household sector. This might be indicative of non-linearities, whereby indebtedness begins to bite only when misalignments from sustainable debt dynamics become excessive. JEL Classification: C13, C23, C52, D12, H31

Suggested Citation

  • Albuquerque, Bruno & Krustev, Georgi, 2015. "Debt overhang and deleveraging in the US household sector: gauging the impact on consumption," Working Paper Series 1843, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20151843
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    References listed on IDEAS

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    Cited by:

    1. Bruno Albuquerque, 2017. "One Size Fits All? Monetary Policy And Asymmetric Household Debt Cycles In Us States," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/937, Ghent University, Faculty of Economics and Business Administration.

    More about this item

    Keywords

    Consumption function; Debt overhang; Household deleveraging; Housing wealth;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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