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

107 Pages Posted: 14 Sep 2018 Last revised: 11 Feb 2020

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 consequences of a sudden increase in household debt burdens by exploiting variation in exposure to household foreign currency debt during Hungary’s late-2008 currency crisis. The revaluation of debt burdens causes higher default rates and a collapse in spending. These responses lead to a worse local recession, driven by a decline in local demand, and negative spillover effects on nearby borrowers without foreign currency debt. The estimates translate into an output multiplier on higher debt service of 1.67. The impact of debt revaluation is particularly severe when foreign currency debt is concentrated on household, rather than firm, balance sheets.

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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