Macroeconomic Implications of Rising Household Debt
Household borrowing has grown considerably in many countries over the past two decades, both in absolute terms and relative to household incomes. Much of the increase can be viewed as a rational response by households to the effects of easing liquidity constraints on households, and lower inflation and borrowing rates. Regardless of whether the increase in debt is sustainable, it has important macroeconomic implications. The household sector will be more sensitive to shocks to interest rates and household incomes, and consumption spending will be more sensitive to changes in expectations of future income. The increased sensitivity will depend crucially on the distribution of debt across the household sector.
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The effects of inﬂation taxes and debtservice constraints on household borrowing
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aggregate household Australia Bank of Australia Bank of England borrowing rates changes in interest constraint on household consumption spending cost of borrowing debt service debt-service constraint debt-to-income ratio decline disposable income distribution of debt easing of liquidity economy effect ﬁnance ﬁnancial deregulation ﬁnancial institutions Finland ﬁrst ﬁxed rate funds Graph growth in household higher home ownership household borrowing household debt household income household indebtedness household sector households to borrow Housing equity withdrawal housing market housing services housing stock impact income quintile increase in household increased indebtedness inﬂuence Interest rate deregulation interest rate risk labour income life-cycle model liquidity constraints loan macroeconomic mortgage interest payments mortgage rates negative equity Netherlands Bank nominal interest rates Nordic countries number of countries policy interest rate purchase recession reduced reﬁnancing reﬂects relative repayments rise in unemployment rising house prices securitised shocks signiﬁcant signiﬁcantly Sweden tax deductibility tax treatment United Kingdom