The Rise in Us Household Debt: Assessing its Causes and Sustainability

Bank of England Working Paper No. 206

38 Pages Posted: 29 Sep 2004

See all articles by Sebastian Barnes

Sebastian Barnes

Bank of England - Monetary Analysis

Garry Young

National Institute of Economic and Social Research

Date Written: November 2003

Abstract

This paper considers the causes of the rise in US household debt since the early 1970s using a calibrated partial equilibrium overlapping generations model. The model explains indebtedness in terms of a consumption-income motive, associated with consumption smoothing, and a housing-finance motive. A credit constraint on borrowing by the old is also introduced to explain why they do not borrow to finance homeownership late in life. Shocks to real interest rates and income growth expectations, combined with demographic changes, are considered to explain the rise in US household debt. The calibrated model is found to be able to explain many features of US household borrowing, both in aggregate and cross-section. In particular, it predicts that the debt to income ratio would have increased substantially during the 1990s and would be expected to continue to grow in coming years. However, the model is unable to account for rising indebtedness during the 1980s when high interest rates, lower income growth and an ageing population would have tended to reduce aggregate borrowing. Alternative explanations, possibly associated with financial liberalisation, may account for borrowing growth during that period.

Keywords: Consumption, household debt, housing

JEL Classification: E21, G11

Suggested Citation

Barnes, Sebastian and Young, Garry, The Rise in Us Household Debt: Assessing its Causes and Sustainability (November 2003). Bank of England Working Paper No. 206, Available at SSRN: https://ssrn.com/abstract=597444 or http://dx.doi.org/10.2139/ssrn.597444

Sebastian Barnes

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Garry Young (Contact Author)

National Institute of Economic and Social Research ( email )

2 Dean Trench Street
Smith Square
London, SW1P 3HE
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,143
Abstract Views
4,615
rank
24,297
PlumX Metrics