How to Tame the Household Debt Without Raising the Interest Rates?

Abstract

Consequent to alarming household debt levels and depressed capital market conditions, policy-makers in many countries are facing a dilemma either to raise interest rates to curtail household debt or to do the opposite for boosting their economies and capital markets. The traditional policy offers no solution for achieving these opposing targets. This paper explains that the loan-term (in relation to long-term household loans) has some interesting properties which could be useful for targeting household debt without making any changes to the interest rate. Even it could be possible to relax monetary policy and at the same time tighten household spending by regulating the loan-term. Further, the policy decisions based on combinations of loanterm and interest rate can lead to more desirable outcomes, e.g. tightening aggregate consumption without much adverse impact on the strugglers in the community. Considering that the traditional policy is a global phenomenon, this paper has implications for the policymakers, financial institutions and household borrowers all over the world.