Determinants of household debt in emerging economies: A macro panel analysis

Khairunnisa Abd Samad,Siti Nurazira Mohd Daud,Nuradli Ridzwan Shah Mohd Dali,David Mcmillan

doi:10.1080/23311975.2020.1831765

Abstract

A rapid increase in household debt is undeniably a main concern among policymakers. Studies indicating the damaging effect of rapid rise in household debt towards economic growth attracted many researchers to determine its reasons. The risk from high household debt is not only applicable to advanced economies, but also inherent in emerging economies. Thus, the present study examines the leading causes of household debt in emerging economies. The study employs a bias-corrected least square dummy variable for the period of 1995–2018. The results show positive and significant effects of financial development, house prices, and lending interest rate. Meanwhile, unemployment rate and inflation are negatively associated with household debt. The study therefore urges policymakers, relevant authority and financial institutions to employ suitable and effective policy to mitigate the factors identified in the rise of household debt.

Highlights

Household debt has been historically high in many countries
This study suggests that higher household debt is caused by financial development, higher house prices and higher lending interest rate, followed by lower inflation and unemployment rate
The empirical evidences clearly explain the nature of household debt which continues to rise in emerging countries as a result of high financial development, inflated house price, and higher lending interest rate

Summary

Introduction

Household debt has been historically high in many countries. The Organisation for Economic Cooperation and Development (OECD) defined household debt as an obligation or liability to pay interest or principal by household arising from borrowing money on credit. Where household debt (HD) is a function of GDP per capita income (GDPPC), unemployment (UN), working population (WPOP), inflation rate (INF), lending interest rate (LIR), household consumption (CON), house prices (HPI) and financial development (FD). To capture the effects of income, unemployment, working population, inflation rate, lending interest rate, household consumption, house price and financial development, the study proposes the household debt model as follows: HDi;t 1⁄4 ρHDi;tÀ 1 þ α0 þ α1GDPPCit þ α2UNit þ α3WPOPit þ α4INFit þ α5LIRit þ α6CONit þ α7HPIit þ α8FDitεit (2). Employing Monte Carlo experimentations, the results of their studies propose that the use of LSDVC would allow a lagged endogenous variable even with the presence of a small cross-section of the sample In line with this method, this study adheres to Bruno’s (2005b) approach for empirical analysis in finding out the determinants of household debt in emerging economies

Findings

Empirical discussion

Conclusion