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Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

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The past decades have witnessed a strong increase in household debt and high growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt (‘keeping up with the Joneses’). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints and the prospect of future capital gains. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the financial deregulation hypothesis argues that deregulation of the financial sector boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 11 OECD countries (1980-2011). Results indicate that real estate prices and low interest rates were the most important drivers of household debt. In contrast the data does not support the expenditure cascades hypothesis as a general explanation of debt accumulation across OECD countries. Our results are consistent with the financial deregulation hypothesis, but its explanatory power for the 1995-2007 period is low.

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  • Stockhammer, Engelbert & Wildauer, Rafael, 2017. "Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries," Economics Discussion Papers 2017-3, School of Economics, Kingston University London.
  • Handle: RePEc:ris:kngedp:2017_003
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    2. Ozlem Albayrak, 2020. "Household Consumption, Household Indebtedness, and Inequality in Turkey: A Microeconometric Analysis," Economics Working Paper Archive wp_954, Levy Economics Institute.
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    4. Mark Setterfield & Yun K. Kim, 2018. "Varieties of Capitalism, Increasing Income Inequality, and the Sustainability of Long-Run Growth," Working Papers 1806, New School for Social Research, Department of Economics.
    5. Enea Baselgia & Isabel Z. Martínez, 2020. "A Safe Harbor: Wealth-Income Ratios in Switzerland over the 20th Century and the Role of Housing Prices," KOF Working papers 20-487, KOF Swiss Economic Institute, ETH Zurich.
    6. James Wood & Engelbert Stockhammer, 2020. "House prices, private debt and the macroeconomics of comparative political economy," Working Papers PKWP2005, Post Keynesian Economics Society (PKES).
    7. Francesco Ruggeri, 2021. "Household debt, aggregate demand, and instability in a Stock-Flow model," Working Papers 4/21, Sapienza University of Rome, DISS.

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    More about this item

    Keywords

    household debt; income distribution; property prices;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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