The Quarterly Journal of Economics· 2017Q1
Household Debt and Business Cycles Worldwide*
- 752citations
- Q1SCImago
- 2017year
Short summary
Rising household debt-to-GDP ratios predict lower GDP growth and higher unemployment globally, with low mortgage spreads indicating credit supply shocks and flawed expectations contributing to over-prediction of growth.
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Key points
- Higher household debt-to-GDP ratios predict lower future GDP growth and higher unemployment.
- Low mortgage spreads are linked to rising debt and declining GDP growth, indicating credit supply shocks.
- Economic forecasters systematically over-predict GDP growth after household debt booms.
- The negative link between debt and growth is stronger in countries with less flexible exchange rates.
- A global household debt cycle influences the severity of global growth slowdowns.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract An increase in the household debt to GDP ratio predicts lower GDP growth and higher unemployment in the medium run for an unbalanced panel of 30 countries from 1960 to 2012. Low mortgage spreads are associated with an increase in the household debt to GDP ratio and a decline in subsequent GDP growth, highlighting the importance of credit supply shocks. Economic forecasters systematically over-predict GDP growth at the end of household debt booms, suggesting an important role of flawed expectations formation. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries with less flexible exchange rate regimes. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.
The authors' abstract, as published at the source. The Quarterly Journal of Economics, 2017 · DOI ↗
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Field: General Economics, Econometrics and Finance
General Economics, Econometrics and FinanceEconomics, Econometrics and Finance