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Low interest rates and the distribution of household debt

Author

Listed:
  • Marina Emiris

    (Economics and Research Department, NBB)

  • François Koulischer

    (University of Luxembourg, Department of Finance)

Abstract

We study how changes in interest rates affect the borrowing of households and the distribution of debt within the population. In a model of household borrowing with credit constraints and endogenous house prices, we show that less constrained households with more pre-existing housing wealth increase their borrowing most when interest rates fall. We then use unique loan level data on the universe of household credit in Belgium to document a shift in the distribution of debt over age, with older households borrowing more as interest rates fell in the last decade. First-time borrowers, who are more likely to be constrained, do not contribute to the rise in household debt. To identify the elasticity of household debt to the interest rate, we use regulatory data on foreign exposures of banks and on the location of bank branches. We find that a 1 percentage point fall in the interest rate is associated with a 15% growth in household debt.

Suggested Citation

  • Marina Emiris & François Koulischer, 2021. "Low interest rates and the distribution of household debt," Working Paper Research 398, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:202103-398
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    File URL: https://www.nbb.be/fr/articles/low-interest-rates-and-distribution-household-debt
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    Cited by:

    1. Enache Calcedonia, 2022. "Macroeconomic Determinants of Household Indebtedness in Romania: An Econometric Approach," Journal of Social and Economic Statistics, Sciendo, vol. 11(1-2), pages 102-117, December.

    More about this item

    Keywords

    Interest Rates; Household Debt; Mortgages; Credit Constraints;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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