Household Debt and Spending in the United Kingdom

37 Pages Posted: 7 Oct 2015 Last revised: 9 Oct 2015

Date Written: October 2, 2015

Abstract

Household debt rose sharply in the United Kingdom in the decade before the financial crisis. This paper uses household level microdata to investigate the relationship between mortgage debt and consumption. We find evidence that more highly indebted groups of households made larger cuts in spending following the financial crisis: spending cuts associated with debt may have reduced the level of aggregate private consumption by up to 2% after 2007. Survey data suggest that large cuts in spending by indebted households after 2007 may reflect a combination of tighter credit conditions and increased concerns about ability to make future debt repayments. The potential for household indebtedness to lead to large adverse impacts on aggregate demand was an important reason why the Bank of England’s Financial Policy Committee took policy action at its June 2014 meeting.

Keywords: Household spending, debt

JEL Classification: D10, D11, D14, E21

Suggested Citation

Bunn, Philip and Rostom, May, Household Debt and Spending in the United Kingdom (October 2, 2015). Bank of England Working Paper No. 554. Available at SSRN: https://ssrn.com/abstract=2669425 or http://dx.doi.org/10.2139/ssrn.2669425

Philip Bunn (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

May Rostom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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