Household Financial Vulnerability: An Empirical Analysis

Abstract

Using survey data, we investigate household financial distress. Specifically, we propose an indicator of financial vulnerability to jointly analyze different features of household financial distress, analyzing its socio-demographic and economic determinants. A total number of 3,102 Italian households make up the sample. The empirical analysis highlights that for the median level of the financial vulnerability index households already exhibit some important symptoms of financial vulnerability, such as problems in getting to the end of the month or an inability to face unexpected expenses. As regards the determinants of the financial vulnerability index, three findings need to be pointed out. First, the level of debt servicing is positively related to financial vulnerability and the effect is stronger for households holding unsecured debt, i.e. consumer credit. Second, financial vulnerability also increases for impulsive individuals, who may adopt impatient, short-sighted behavior patterns which make it difficult for them to be fully aware of the consequences of their financial and spending decisions. Third, a higher level of education helps to reduce financial fragility.

Keywords: financial vulnerability index, household debt, consumer credit, survey data, principal component analysis

JEL Classification: C21, D14, D91, G21