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Expenditure cascades, low interest Rates, credit deregulation or property booms? Determinants of household debt in OECD countries

Expenditure cascades, low interest Rates, credit deregulation or property booms? Determinants of household debt in OECD countries

Wildauer, Rafael and Stockhammer, Engelbert (2018) Expenditure cascades, low interest Rates, credit deregulation or property booms? Determinants of household debt in OECD countries. Review of Behavioral Economics, 5 (2). pp. 85-121. ISSN 2326-6198 (Print), 2326-6201 (Online) (doi:https://doi.org/10.1561/105.00000083)

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Abstract

The past decades have witnessed a strong increase in household debt and fast growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt (‘keeping up with the Joneses’). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints, the prospects of future capital gains and changes in mental accounts. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the credit market deregulation hypothesis argues that deregulation boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 13 OECD countries (1980-2011). Results indicate that real estate prices were the most important drivers of household debt which we interpret as the result of speculative dynamics in real estate markets. In contrast we do not find a significant impact of shifts in the income distribution on household sector indebtedness. Our results are consistent with the credit deregulation and low interest rate hypotheses, but their explanatory power for the 1995-2007 period is low.

Item Type: Article
Uncontrolled Keywords: household debt, income distribution, property prices
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA)
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Greenwich Political Economy Research Centre (GPERC)
Related URLs:
Last Modified: 08 May 2019 13:49
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: GREAT 3
URI: http://gala.gre.ac.uk/id/eprint/20882

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