Household debt and spending during the financial crisis: Evidence from Danish micro data

TY - JOUR

T1 - Household debt and spending during the financial crisis: Evidence from Danish micro data

AU - Andersen, Asger Lau

AU - Duus, Charlotte

AU - Jensen, Thais Lærkholm

N1 - JEL classification: D12; E21; E65

PY - 2016/10/1

Y1 - 2016/10/1

N2 - We use data for nearly 500,000 Danish households to study the relationship between household leverage prior to the financial crisis of 2007–2009 and the development in spending over the course of the crisis. We find a strong negative correlation between pre-crisis leverage and the change in spending during the crisis. This reflects that highly levered households spent a larger share of their income than their less-levered peers prior to the crisis, resulting in larger increases in debt in these years. Once we condition on the size of the pre-crisis change in debt, a high level of debt is no longer associated with a larger spending decline. Our results suggest that the larger decline in spending among high-leverage households is the result of a spending normalization pattern that is also found in other years, rather than a causal effect of high debt levels suppressing household spending during the crisis.

AB - We use data for nearly 500,000 Danish households to study the relationship between household leverage prior to the financial crisis of 2007–2009 and the development in spending over the course of the crisis. We find a strong negative correlation between pre-crisis leverage and the change in spending during the crisis. This reflects that highly levered households spent a larger share of their income than their less-levered peers prior to the crisis, resulting in larger increases in debt in these years. Once we condition on the size of the pre-crisis change in debt, a high level of debt is no longer associated with a larger spending decline. Our results suggest that the larger decline in spending among high-leverage households is the result of a spending normalization pattern that is also found in other years, rather than a causal effect of high debt levels suppressing household spending during the crisis.

KW - Faculty of Social Sciences

KW - D12

KW - E21

KW - E65

U2 - 10.1016/j.euroecorev.2016.06.006

DO - 10.1016/j.euroecorev.2016.06.006

M3 - Journal article

SN - 0014-2921

VL - 89

SP - 96

EP - 115

JO - European Economic Review

JF - European Economic Review

ER -