IDEAS home Printed from
   My bibliography  Save this paper

Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis


  • Emil Verner

    (Princeton University)


This paper examines how an increase in household debt affects the local economy using a foreign currency debt crisis in Hungary as a natural experiment. We construct shocks to local household debt burdens by exploiting spatial variation in households’ exposure to foreign currency debt during the large (over 30%) and unexpected depreciation of the Hungarian forint in late 2008. We first show that a shock to local household debt leads to a rise in default rates and a persistent decline in local durable and non-durable consumption. Next, we find that regions with greater exposure to foreign currency debt experience a persistent increase in local unemployment. Firm-level census data reveal that employment losses are driven by firms dependent on local demand. Exposed areas see a modest decline in wages, but no adjustment through reallocation toward exporting firms or migration. In addition to the direct effect of higher debt, we find evidence of local spillovers. Regional exposure to foreign currency debt predicts a decline in house prices and an increase in the probability of default for households with only domestic currency debt. Our results are consistent with demand and pecuniary externalities of household foreign currency debt financing.

Suggested Citation

  • Emil Verner, 2018. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis," 2018 Meeting Papers 591, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:591

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Liliana Varela & Juliana Salomao, 2016. "Exchange Rate Exposure and Firm Dynamics," Working Papers 2016-278-05, Department of Economics, University of Houston.
    2. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Tomasz Piskorski & Amit Seru, 2017. "Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program," Journal of Political Economy, University of Chicago Press, vol. 125(3), pages 654-712.
    3. Ethan Ilzetzki & Carmen M Reinhart & Kenneth S Rogoff, 2019. "Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold?," The Quarterly Journal of Economics, Oxford University Press, vol. 134(2), pages 599-646.
    4. Matthew Baron & Wei Xiong, 2017. "Credit Expansion and Neglected Crash Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 132(2), pages 713-764.
    5. Pinar Yesin, 2013. "Foreign currency loans and systemic risk in Europe," Review, Federal Reserve Bank of St. Louis, vol. 95(May), pages 219-236.
    6. Gabor Vadas & Gergely Kiss, 2005. "The Role of the Housing Market in Monetary Transmission," Macroeconomics 0512010, University Library of Munich, Germany.
    7. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration," Research Department Publications 4581, Inter-American Development Bank, Research Department.
    8. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1880-1897.
    9. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
    10. Brian S. Chen & Samuel G. Hanson & Jeremy C. Stein, 2017. "The Decline of Big-Bank Lending to Small Business: Dynamic Impacts on Local Credit and Labor Markets," NBER Working Papers 23843, National Bureau of Economic Research, Inc.
    11. Martin Beraja & Erik Hurst & Juan Ospina, 2019. "The Aggregate Implications of Regional Business Cycles," Econometrica, Econometric Society, vol. 87(6), pages 1789-1833, November.
    12. repec:mnb:ecbook:2006 is not listed on IDEAS
    13. Kim, Yun Jung & Tesar, Linda L. & Zhang, Jing, 2015. "The impact of foreign liabilities on small firms: Firm-level evidence from the Korean crisis," Journal of International Economics, Elsevier, vol. 97(2), pages 209-230.
    14. Krishnamurthy, Arvind & Muir, Tyler, 2017. "How Credit Cycles across a Financial Crisis," Research Papers repec:ecl:stabus:3579, Stanford University, Graduate School of Business.
    15. Paul Goldsmith-Pinkham & Isaac Sorkin & Henry Swift, 2020. "Bartik Instruments: What, When, Why, and How," American Economic Review, American Economic Association, vol. 110(8), pages 2586-2624, August.
    16. Devereux, Michael B. & Smith, Gregor W., 2007. "Transfer problem dynamics: Macroeconomics of the Franco-Prussian war indemnity," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2375-2398, November.
    17. Zhen Huo & Jose-Victor Rios-Rull, 2016. "Financial Frictions, Asset Prices, and the Great Recession," Staff Report 526, Federal Reserve Bank of Minneapolis.
    18. Adam Banai & Julia Kiraly & Marton Nagy, 2011. "The demise of the halcyon days in Hungary: “foreign” and “local” banks – before and after the crisis," BIS Papers chapters, in: Bank for International Settlements (ed.),The global crisis and financial intermediation in emerging market economies, volume 54, pages 195-224, Bank for International Settlements.
    19. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration," NBER Working Papers 14026, National Bureau of Economic Research, Inc.
    20. Cerutti, Eugenio & Claessens, Stijn & Laeven, Luc, 2017. "The use and effectiveness of macroprudential policies: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 203-224.
    21. Steven Ongena & Ibolya Schindele & Dzsamila Vonnák, 2017. "In Lands of Foreign Currency Credit, Bank Lending Channels Run Through?," MNB Working Papers 2017/6, Magyar Nemzeti Bank (Central Bank of Hungary).
    22. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    23. Arvind Krishnamurthy & Tyler Muir, 2017. "How Credit Cycles across a Financial Crisis," NBER Working Papers 23850, National Bureau of Economic Research, Inc.
    24. Andreas Fuster & Paul S. Willen, 2017. "Payment Size, Negative Equity, and Mortgage Default," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 167-191, November.
    25. Martin Brown & Marcel Peter & Simon Wehrmüller, 2009. "Swiss Franc Lending in Europe," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 64(02), pages 167-181, June.
    26. Liliana Varela, 2018. "Reallocation, Competition, and Productivity: Evidence from a Financial Liberalization Episode," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 1279-1313.
    27. Eichengreen, Barry & Hausmann, Ricardo (ed.), 2005. "Other People's Money," University of Chicago Press Economics Books, University of Chicago Press, number 9780226194554, October.
    28. Peter Harasztosi & Attila Lindner, 2019. "Who Pays for the Minimum Wage?," American Economic Review, American Economic Association, vol. 109(8), pages 2693-2727, August.
    29. Sumit Agarwal & Gene Amromin & Souphala Chomsisengphet & Tim Landvoigt & Tomasz Piskorski & Amit Seru & Vincent Yao, 2015. "Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program," NBER Working Papers 21512, National Bureau of Economic Research, Inc.
    30. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2011. "Foreign currency borrowing by small firms in the transition economies," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 285-302, July.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Adrien Auclert & Will S. Dobbie & Paul Goldsmith-Pinkham, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," NBER Working Papers 25685, National Bureau of Economic Research, Inc.
    2. de Ferra, Sergio & Mitman, Kurt & Romei, Federica, 2020. "Household heterogeneity and the transmission of foreign shocks," Journal of International Economics, Elsevier, vol. 124(C).
    3. Camila Casas & Sergii Meleshchuk & Yannick Timmer, 2020. "The Dominant Currency Financing Channel of External Adjustment," Borradores de Economia 1111, Banco de la Republica de Colombia.
    4. Fergus Cumming, 2019. "Mortgage Cash-flows and Employment," Discussion Papers 1922, Centre for Macroeconomics (CFM).
    5. José Antonio Ocampo & Germán D. Orbegozo & Mauricio Villamizar-Villegas, 2020. "Post-graduation from the original sin problem The effects of market participation on sovereign debt markets," Borradores de Economia 1113, Banco de la Republica de Colombia.
    6. Rustam Ibragimov & Jihyun Kim & Anton Skrobotov, 2020. "New robust inference for predictive regressions," Papers 2006.01191,, revised Aug 2020.
    7. Fetzer, Thiemo & Sen, Srinjoy & Souza, Pedro CL, 2019. "Housing insecurity, homelessness and populism: Evidence from the UK," CEPR Discussion Papers 14184, C.E.P.R. Discussion Papers.
    8. Fetzer, Thiemo & Sen, Srinjoy & Souza, Pedro CL, 2019. "Housing insecurity, homelessness and populism: Evidence from the UK," CAGE Online Working Paper Series 444, Competitive Advantage in the Global Economy (CAGE).
    9. Fetzer, Thiemo & Sen, Srinjoy & Souza, Pedro CL, 2019. "Housing insecurity, homelessness and populism : Evidence from the UK," The Warwick Economics Research Paper Series (TWERPS) 1232, University of Warwick, Department of Economics.
    10. Walter Distaso & Rustam Ibragimov & Alexander Semenov & Anton Skrobotov, 2020. "COVID-19: Tail Risk and Predictive Regressions," Papers 2009.02486,
    11. Juelsrud, Ragnar E. & Wold, Ella Getz, 2019. "The Saving and Employment Effects of Higher Job Loss Risk," Working Paper 2019/17, Norges Bank.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed018:591. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.