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

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  • Emil Verner

    (Princeton University)

Abstract

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
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    File URL: https://economicdynamics.org/meetpapers/2018/paper_591.pdf
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    References listed on IDEAS

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    Citations

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    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, arXiv.org, 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, arXiv.org.
    11. Juelsrud, Ragnar E. & Wold, Ella Getz, 2019. "The Saving and Employment Effects of Higher Job Loss Risk," Working Paper 2019/17, Norges Bank.

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