Work

Do households with debt cut back their consumption more? New evidence from the United Kingdom

Year: 2021

Type: article

Abstract: We investigate whether the debt position of UK households affects the response of nondurable consumption to income and wealth changes. We construct a novel estimate of nondurable consumption to track the same individual households over time for an extended period ranging from 1993 to 2017. Using this series, we explore how household indebtedness propagates negative and positive income and wealth changes to consumption responses. We assess whether negative and positive shocks imply the same consumption adjustments and whether such mechanism is crisis specific. Our evidence reveals that falls in income trigger substantially larger adjustments in consumption than income rises for households with debt, while the findings for wealth are less conclusive. The results also point to a macro‐financial link between a debt overhang and consumer spending, which carries implications for macro‐prudential policy makers aiming to ensure household resilience. These effects are not specific to the financial crisis period.

Source: Bulletin of Economic Research

DOI: 10.1111/boer.12317

Authors: Apostolos Fasianos, Reamonn Lydon

Institutions: Brunel University of London, Central Bank of Ireland

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: No poverty

Open Access status: hybrid

Estimated APC paid: $2,500