Household Debt: Recent Developments and Challenges

Abstract

The responsiveness of aggregate expenditure to shocks depends on the level and interest rate sensitivity (duration) of household debt, as well as on the liquidity of the assets it finances. Household-level spending adjustments are more likely to be amplified if debt is concentrated among households with limited access to credit or with less scope for self-insurance. The way in which household indebtedness affects the sensitivity of aggregate expenditure matters for both macroeconomic and financial stability. Financial institutions can suffer balance sheet distress from both direct and indirect exposure to the household sector. From a macroeconomic stability viewpoint, monetary transmission is the key issue. In a high-debt economy, interest rate hikes could be more contractionary than cuts are expansionary. These considerations point to a complementarity between current macroprudential and future monetary policy.

JEL Classification: E21, E24, E52, E58, D15, G01