The Effect of Households’ Indebtedness on Their Consumption

A new GLO Discussion Paper finds for Belgium a negative effect of households’ indebtedness on their consumption.

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GLO Discussion Paper No. 799, 2021

A Bigger House at the Cost of an Empty Fridge? The Effect of Households’ Indebtedness on Their Consumption: Micro-Evidence Using Belgian HFCS Data Download PDF
by
Du Caju, Philip & Périlleux, Guillaume & Rycx, François & Tojerow, Ilan

GLO Fellows François Rycx and Ilan Tojerow

Author Abstract: This paper investigates the potentially non-linear relation between households’ indebtedness and their consumption between 2010 and 2014 in Belgium, using panel data from the two waves of the Household Finance and Consumption Survey. Unlike previous studies, we find a negative effect of households’ indebtedness on their consumption, even in the absence of negative shock on their assets. Our findings suggest that, without such a shock, it is the day-to-day sustainability of the debt, rather than its overall sustainability, that leads households to reduce their consumption. We perform as well a threshold analysis, whose results suggest that households should not have a debt-service-to-income ratio greater than 30%. The effect appears to be robust to various specifications, to result from a trade-off between housing and consumption, and to be more prevalent among more fragile households.

GLO Discussion Papers are research and policy papers of the GLO Network which are widely circulated to encourage discussion. Provided in cooperation with EconStor, a service of the ZBW – Leibniz Information Centre for Economics, GLO Discussion Papers are among others listed in RePEc (see IDEAS,  EconPapers)Complete list of all GLO DPs – downloadable for free.

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