Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in Australia
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 “debt-driven household demand” channel.
I have benefitted from comments from or discussions with Johan Almenberg, Asger Andersen, Claes Bäckman, Benjamin Beckers, Robert Boije, Peter Englund, Gianni La Cava, David Norman, and Roine Vestman. I am especially grateful to Benjamin Beckers, who has kindly provided code for regressions on the HILDA dataset, and to the Australian Data Archive, which has granted me access to the dataset of the General Release of the HILDA survey. Support from the Jan Wallander and Tom Hedelius research foundation and the Tore Browaldh research foundation is gratefully acknowledged. The findings and views based on the HILDA data used in the paper should not be attributed to either the Australian Government Department of Social Services (DSS) or the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). Views expressed and any errors are my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.