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
Date Written: October 8, 2018
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
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