Working Paper: NBER ID: w28776
Authors: Lars E.O. Svensson
Abstract: The “debt-overhang hypothesis” – that households cut back more on their spending in a crisis when they have higher levels of outstanding mortgage debt (Dynan, 2012) – seems to be taken for granted by macroprudential authorities in several countries in their policy decisions, as well as by the international organizations that evaluate and comment on countries’ macroprudential policy. New results for Australian microdata are presented that reject the debt-overhang hypothesis. The results instead support the “spending-normalization hypothesis” of Andersen, Duus, and Jensen (2016), what can also be called the “debt-financed overspending” hypothesis – that the correlation between high pre-crisis household indebtedness and subsequent spending falls during the crisis reflects high debt-financed spending pre-crisis and a return to normal spending during the crisis. As discussed in Svensson (2019, 2020), this is consistent with the above correlation reflecting debt-financed overspending through what Muellbauer (2012) calls the “housing-collateral household demand” channel and Mian and Sufi (2018) the “credit-driven household demand” channel.
Keywords: household debt; spending fall; financial crisis; Australia; debt-overhang hypothesis; spending-normalization hypothesis
JEL Codes: E21; G01; G18; G21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High pre-crisis household indebtedness (F65) | Return to normal spending during the crisis (H12) |
| High pre-crisis household indebtedness (F65) | Subsequent spending cuts during the financial crisis (H69) |
| Return to normal spending during the crisis (H12) | Subsequent spending cuts during the financial crisis (H69) |
| High pre-crisis household indebtedness (F65) | Overspending prior to the crisis (H12) |