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PKSG Working Paper Series

Working Paper PKWP1803

The drivers of household indebtedness re-considered: an empirical evaluation of competing arguments on the macroeconomic determinants of household indebtedness in OECD countries

February 2018

Glennie Lauren Moore, Engelbert Stockhammer

Household debt is at a record high in most OECD countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This paper empirically tests seven competing arguments on the macroeconomic determinants of household indebtedness together in one econometric study. The arguments are that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population and the short-term interest rate drive household indebtedness. We test these arguments for a panel of 13 OECD countries over the period 1993 - 2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.

Keywords: household debt, house prices, cycles

JEL classification: E19: General Aggregative Models: Other E21: Macroeconomics: Consumption; Saving; Wealth R20: Urban, Rural, Regional, Real Estate, and Transportation Economics: Household Analysis: General

Download: Working Paper PKWP1803