NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Household Debt and Business Cycles Worldwide

Atif R. Mian, Amir Sufi, Emil Verner

NBER Working Paper No. 21581
Issued in September 2015
NBER Program(s):   AP   CF   EFG   IFM   ME   PR

A rise in the household debt to GDP ratio predicts lower output growth and higher unemployment over the medium-run, contrary to standard macroeconomic models. GDP forecasts by the IMF and OECD underestimate the importance of a rise in household debt to GDP, giving the change in household debt to GDP ratio of a country the ability to predict growth forecasting errors. We use lower credit spreads and increases in risky debt issuance as instruments for the rise in household debt to GDP to argue that our results are supportive of recent models where debt growth is driven by changes in credit supply, borrowing constraints, or risk premia. We also show that a rise in household debt to GDP is associated contemporaneously with a rising consumption share of output, a worsening of the current account balance, and a rise in the share of consumption goods within imports. This is followed by strong external adjustment when the economy slows as the current account reverses and net exports increase due to a sharp fall in imports. Finally, an increase in global household debt to GDP also predicts lower global output growth. The pre-2000 predicted relationship between global household debt changes and subsequent global growth matches closely the actual decline in global growth after 2007 given the large increase in household debt during the early to mid-2000s.

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Document Object Identifier (DOI): 10.3386/w21581

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