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The Rise in U.S. Household Indebtedness: Causes and Consequences

Karen E. Dynan
Brookings Institution

Donald L. Kohn
Board of Governors of the Federal Reserve


August 8, 2007

FEDS Working Paper No. 2007-37

Abstract:     
The ratio of total household debt to aggregate personal income in the United States has risen from an average of 0.6 in the 1980s to an average of 1.0 so far this decade. In this paper we explore the causes and consequences of this dramatic increase. Demographic shifts, house price increases, and financial innovation all appear to have contributed to the rise. Households have become more exposed to shocks to asset prices through the greater leverage in their balance sheets, and more exposed to unexpected changes in income and interest rates because of higher debt payments relative to income. At the same time, an increase in access to credit and higher levels of assets should give households, on average, a greater ability to smooth through shocks. We conclude by discussing some of the risks associated with some households having become very highly indebted relative to their assets.

Keywords: Household debt, consumer finance, personal saving

JEL Classifications: E21, E44

Working Paper Series

Date posted: October 03, 2007 ; Last revised: October 03, 2007

Suggested Citation

Dynan, Karen E. and Kohn, Donald L., The Rise in U.S. Household Indebtedness: Causes and Consequences (August 8, 2007). FEDS Working Paper No. 2007-37. Available at SSRN: http://ssrn.com/abstract=1019052


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Contact Information

Karen E. Dynan (Contact Author)
Brookings Institution ( email )
1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
Donald L. Kohn
Board of Governors of the Federal Reserve ( email )
20th and C Streets, NW
Washington, DC 20551
United States
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