Accounting for the Effect of Household Debt on Economic Growth: The Role of Markup Dynamics

Abstract

This paper investigates the effect of household debt on aggregate markup, and consequently real GDP by using the local projection method found in Jordà (2005). We show that markup dynamics play a contributing role in examining the effect of household debt on real GDP. Our main empirical results are as follows: (1) An increase in household debt is positively related with aggregate markup. (2) Household consumption decreases as markup rises. (3) With the positive association between markup and household debt, real GDP and household consumption decrease in response to positive household debt shock.