Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis

83 Pages Posted: 14 Sep 2018 Last revised: 15 Oct 2018

See all articles by Emil Verner

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Gyozo Gyongyosi

Kiel Institute for the World Economy

Date Written: October 8, 2018

Abstract

We examine the real economic consequences of a sudden increase in household debt burdens by exploiting spatial variation in the prevalence of household foreign currency debt during Hungary’s late-2008 currency crisis. The increase in debt burdens leads to higher default rates and a collapse in spending. These responses translate into a worse local recession and depressed house prices. A 10 point increase in debt-to-income raises the unemployment rate by 0.6 percentage points, driven by employment losses at non-exporting firms. Consistent with demand externalities of risky debt financing, regional foreign currency debt has negative spillover effects on nearby borrowers with only domestic currency debt.

Keywords: household debt, foreign currency debt, currency crisis, financial crisis, business cycles

JEL Classification: E2, E3, G2, F3, D12

Suggested Citation

Verner, Emil and Gyongyosi, Gyozo, Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis (October 8, 2018). Available at SSRN: https://ssrn.com/abstract=3241309 or http://dx.doi.org/10.2139/ssrn.3241309

Emil Verner (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Gyozo Gyongyosi

Kiel Institute for the World Economy ( email )

Kiellinie 66
Kiel, Schleswig-Hosltein 24105
Germany

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