Understanding the Macro-financial Effects of Household Debt: A Global Perspective

Higher household debt is associated with lower future GDP growth in a broad set of 80 countries over the period 1950–2016. Several institutional factors, such as flexible exchange rates, capital account openness, higher financial development and inclusion, mitigate this negative relationship. Three mutually reinforcing mechanisms help explain this relationship. First, increases in household debt amplify the probability of future banking crises, which significantly disrupts financial intermediation. Second, crash risk may be systematically neglected due to investors’ overoptimistic expectations associated with household debt booms. Third, debt overhang impairs household consumption when negative shocks hit.