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Household debt:
a cross-country analysis
Massimo Coletta, Riccardo De Bonis and Stefano Piermattei
Bank of Italy’s Analysis of Household Finances
3 – 4 December 2015
The paper studies the determinants of household financial debt in a set of
In most of the countries household financial debt has reached unprecedented
Source: OECD and Eurostat flow-of-funds database
The growing debt…
In many countries household debt began to increase in the mid-1990s
and accelerated in the first years of the new millennium until the
outbreak of the financial crisis.
In many cases the Great Recession resulted in the stabilization or
reduction of indebteness.
Ratio of household financial debt to GDP (percentages)
Source: OECD and Eurostat flow-of-funds database
…and the rising heterogeneity
Despite similar trends, differences in the level of household debt across
countries increased considerably between 1995 and 2013.
Standard deviation of household financial debt/GDP ratio (33 countries)
Source: OECD and Eurostat flow-of-funds database
A change in the perspective
Before the subprime crisis and the global recession economists had regarded debt
as an instrument for smoothing the inter-temporal allocation of consumers’
resources and for productive investment.
After the crisis academic analysts and international organisations began to point
out the risks of excessive private debt.
Palumbo and Parker (2009) showed that during the years before subprime
crises US household switched from being net lenders to being net borrowers.
Data signalled imbalances that should have been monitored.
Net lending (+)/Net borrowing (-) by US households
Source: Palumbo and Parker (2009)
Glancing over the literature
Countries that experienced relatively fast household debt growth
also had larger increases in insolvency rates (T. Jappelli, M.
Pagano, M. Di Maggio 2013).
The most extreme academic positions treat over-indebtedness
in the same way as pollution. A tax on excessive debt would
produce a better allocation of resources (Jeanne and Korinek
2010, Bianchi and Mendoza 2010)
The common view is that an excessive debt is not a direct source
of negative shocks to the economy, but it can worsen recession
and hinder recovery (IMF 2012, Barnes and Young 2003, Tudela
and Young 2005, Debelle 2004, Dynan and Kohn 2007).
In our paper
• Understanding the determinants of household debt is
• There are many works on the macro-economic
determinants of household indebtedness (e. g. T. Jappelli,
M. Pagano, M. Di Maggio 2013, Isaksen et al 2011, Zinni
• The novelty of this paper is to study 33 nations (27
countries of EU plus Japan, South Korea, Canada,
Australia, New Zealand and the US) over a long time span
A simple econometric equation
is household financial debt,
are demand side factors and
are supply side factors.
We refer to two major fields:
The life cycle hypothesis (Modigliani 1986, Davies et al 2011, Zinni 2012)
Institutional and comparative economics (La Porta et al 1997, Djankov et al 2007,
Jappelli et al 2010)
The life cycle hypothesis
The life cycle hypothesis looks at variables that can influence
household demand for debt
• Per capita GDP
• GDP growth
• Financial and real assets
• Life expectancy
• Saving
Institutional and comparative economics
At least four variables can influence the supply of debt to households
• Legal origin (Anglo-Saxon vs the others)
• Quality of bankruptcy laws
• Quality of credit registers
• Time to resolve insolvencies
The data
Annual data for 33 countries, from 1995 to 2013
The dependent variable is taken from the flow of funds
collected by the OECD and Eurostat
The sources of the national account variables are the
OECD and Eurostat
Legal origin (La Porta et al 1997)
The other institutional variables are available on the World
Bank website (available from 2004)
The econometric results
Baseline Specification (1995 – 2013)
The role of institutional factors
The role of saving: a sample split
The role of saving: a sample split
What if public debt had a role?
We studied household debt without taking
indebtedness/balance sheets of other sectors.
Given the implications of government debt consolidation for taxation and
asset prices one could argue that household indebtedness and public
finances are not independent:
 High public debt could induce higher expectations (or lower benefits) of
future taxation an hence could increase household saving (Ricardian
equivalence) and reduce demand for loans.
 A higher public debt could induce banks to be regular holder of government
securities, implying a crowding out effects on loans to private sectors.
Specification with public debt
Main conclusions
1. Household debt is greater in richer countries, i.e. where
GDP per capita, financial and real wealth are greater.
2. Efficiency of institutional settings – bankruptcy laws and
efficiency of recovery procedures – are powerful
determinants of household debt.
3. The relationship with saving is significant only in periods of
4. Higher public debt is associated with
lower household
Future agenda
1. Control for the effects of other factors such as tax
treatment of interest payments, house price increases,
financial innovation and openness, bank competition.
2. Scrutinise better the endogeneity links between debt,
saving, real and financial wealth.
3. Sample splits.
4. Investigate the nexus between household debt and
Thank you for your attention !
Bianchi J. and Mendoza E.G. (2010), “Overborrowing, financial crises and macroprudential taxes”, NBER Working Paper No. 16091
Davies J. B., S. Sandstrom, A. Shorrocks and E. Wolff (2011), “The Level and
Distribution of Global Household Wealth”, The Economic Journal, March, 223-254
Bouis R. (2015), “Household develeveraging and saving rates: a cross-country analysis”,
IMF draft.
Djankov, S., C. McLiesh and A. Shleifer A. (2007), “Private Credit in 129 Countries”,
Journal of Financial Economics, Vol. 84(2), 299-329
IMF (2012), “Dealing with Household Debt”, World Economic Outlook, Chapter 3, April
Isaksen J., Kramp P.L., Sorensen F., and Sorensen S.V. (2011), “Household balance
Sheets and Debt – an international country study”, Denmark Nationalbank Monetary
Review 4th Quarter, Part 2
Jappelli T., M. Pagano and M. di Maggio (2010), "Households’ Indebtedness and
Financial Fragility,", CSEF Working Papers 208, Centre for Studies in Economics and
Finance (CSEF), University of Naples
La Porta, R., F. Lopez de Silanes, A. Shleifer and R W. Vishny (1997), “Legal
Determinants of External Finance”, Journal of Finance, Vol. 52(3), pp. 1131-50
Modigliani F. (1986), “Life Cycle, Individual Thrift, and the Wealth of Nations”, American
Economic Review, 76 (2), 297-313
Palumbo M. and Parker J. (2009), “The integrated financial and real system of accounts
for the united states: does it presage the financial crises?”, NBER Working Paper No.
Zinni M. B. (2012), “Essays in Household Financial Balance Sheets”, Ph.D. Thesis, Tor
Vergata University