The Effect of Household Debt on Aggregate Demand - The Case of Spain

34 Pages Posted: 10 Sep 2012

See all articles by Sebastian Jauch

Sebastian Jauch

Ludwig Maximilian University of Munich (LMU)

Sebastian Watzka

Ludwig Maximilian University of Munich (LMU)

Date Written: August 31, 2012

Abstract

Households in some European countries increased their indebtedness massively over the past 20 years. Besides household debt, also government debt and corporate debt are in some countries at levels not seen before. While there is a common agreement that these high debt levels are not sustainable there is fewer consensus about the effect of changes in debt and especially debt levels on aggregate demand. Based on a cross country study of 18 European countries we show that there is a strong link between household sector debt and aggregate demand. We strengthen these results by an analysis for Spanish provinces. The level of household debt in the Spanish provinces is highly significant for changes in aggregate demand that translated into increasing unemployment in these regions during the recession following the financial crisis of 2007/08. We find that on aggregate about 1/3 of the increase in Spanish unemployment can be traced back to high household debt levels.

Keywords: debt, leverage, balance sheet recession, household sector, aggregate demand, unemployment

JEL Classification: E210, J200, O520

Suggested Citation

Jauch, Sebastian and Watzka, Sebastian, The Effect of Household Debt on Aggregate Demand - The Case of Spain (August 31, 2012). CESifo Working Paper Series No. 3924. Available at SSRN: https://ssrn.com/abstract=2144179

Sebastian Jauch

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Ludwigstrasse 28
Munich, Bavaria 80539
Germany

Sebastian Watzka (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

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