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Interlinkages between Household and Corporate Debt in Advanced Economies

Author

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  • Jean-Charles Bricongne
  • Aurora Maria Mordonu

Abstract

This article contributes to the debate on deleveraging in the non-financial private sector. It proposes a framework to assess the interconnectedness of deleveraging in the household sector and in the nonfinancial corporations sector. In doing so, several factors are controlled for: inflation, interest rates, labour intensity and also the influence of the general government debt (neo-ricardian effects). Panel regressions are performed on a set of OECD countries, between 1981 and 2013, to cover several crisis episodes, including the latest one. Instrumental regressions are used, with different instruments. Findings show robust results of mutual and positive influence between households and non-financial corporations' debts developments. It is also found that, in cases where the labour share of GDP is higher, deleveraging by non-financial corporations will take a heavier toll on deleveraging by households. This can be explained by an enhanced functioning of the income channel: corporations squeeze the wage bill in order to restore their profitability. Conversely, among other channels, household deleveraging affects their propensity to consume, which in turn affects corporations profitability that become more incited to deleverage.

Suggested Citation

  • Jean-Charles Bricongne & Aurora Maria Mordonu, 2015. "Interlinkages between Household and Corporate Debt in Advanced Economies," European Economy - Discussion Papers 017, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:dispap:017
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    Cited by:

    1. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.
    2. Romanos Priftis & Anastasia Theofilakou, 2021. "Growth effects of corporate balance sheet adjustments in the EU," Empirical Economics, Springer, vol. 60(2), pages 773-801, February.
    3. Georgios Magkonis & Anastasia Theofilakou, 2019. "Transmission of sectoral debt shocks in OECD countries: Evidence from the income channel," Working Papers in Economics & Finance 2019-02, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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