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Stress Testing Household Debt in Korea

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  • Meral Karasulu

Abstract

Korean household debt has reached 148 percent of disposable income, high by emerging market standards. Most of this debt remains at variable rates, shifting the interest rate risk from better diversified financial institutions to households and increasing their sensitivity to macroeconomic shocks. This paper examines the sources of, and risks from, household debt by employing stress tests on household level panel data. Results suggest that a 100-300 bps increase in interest rates could increase distressed household debt household debt by 8½?17 percentage points (ppt). A drop in real estate prices by 10?30 percent could add another 4 ppt to distressed debt. Ongoing transition to amortizing mortgages in 2008?09 presents additional challenges as interest payments on debt are likely to increase further.

Suggested Citation

  • Meral Karasulu, 2008. "Stress Testing Household Debt in Korea," IMF Working Papers 08/255, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/255
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    Citations

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    Cited by:

    1. Athiphat Muthitacharoen, 2016. "Gauging Households’ Debt Tolerance: Evidence from Thailand," Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 23(1), pages 59-74, June.
    2. International Monetary Fund, 2013. "Brazil; Technical Note on Consumer Credit Growth and Household Financial Stress," IMF Staff Country Reports 13/149, International Monetary Fund.
    3. Petr Jakubík, 2011. "Household Balance Sheets and Economic Crisis," Working Papers IES 2011/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
    4. repec:unt:jnapdj:v:24:y:2017:i:2:p:23-52 is not listed on IDEAS
    5. Kim, Hyun Jeong & Lee, Dongyeol & Son, Jong Chil & Son, Min Kyu, 2014. "Household indebtedness in Korea: Its causes and sustainability," Japan and the World Economy, Elsevier, vol. 29(C), pages 59-76.
    6. Erwin R. Tiongson & Naotaka Sugawara & Victor Sulla & Ashley Taylor & Anna I. Gueorguieva & Victoria Levin & Kalanidhi Subbarao, 2010. "The Crisis Hits Home : Stress-Testing Households in Europe and Central Asia," World Bank Publications, The World Bank, number 2396.
    7. Petr Hlavac & Petr Jakubik & Kamil Galuscak, 2013. "Household stress tests using microdata," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2012/2013, chapter 0, pages 113-119 Czech National Bank, Research Department.
    8. Tom Bilston & David Rodgers, 2013. "A Model for Stress Testing Household Lending in Australia," RBA Bulletin, Reserve Bank of Australia, pages 27-38, December.

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