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

45 Pages Posted: 3 Oct 2007  

Karen E. Dynan

Harvard University; Peterson Institute for International Economics

Donald L. Kohn

Board of Governors of the Federal Reserve

Date Written: August 8, 2007

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 Classification: E21, E44

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: https://ssrn.com/abstract=1019052 or http://dx.doi.org/10.2139/ssrn.1019052

Karen E. Dynan (Contact Author)

Harvard University ( email )

Littauer Center
Cambridge, MA 02138
United States

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://https://piie.com/experts/senior-research-staff/karen-dynan

Donald L. Kohn

Board of Governors of the Federal Reserve ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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