Household Borrowing Research Articles

Spatial disparity in household indebtedness across the UK

PurposeThis paper assesses the lending risks associated with the level of total household indebtedness at the local authority level across the UK.Design/methodology/approachUsing GIS-based Exploratory Data Analysis and mapping, the paper identifies local concentrations of household borrowing, both secured and unsecured, which is referenced against regional Gross Added Value.FindingsSignificant local differences are revealed which are tracked over the period 2013–2019. Total debt relative to the size of economy is larger in London and local authorities around London. A positive correlation was revealed between areas of multiple deprivation in England and those local authorities with proportionally high unsecured lending, confirming that the less well-off require access to debt facilities and in the absence of availability of secured loans, resort to unsecured borrowing.Originality/valueUnderstanding where the additional lending risks are located across the UK is relevant when evaluating the robustness of the economy to recession, with its uneven effects on different sectors and households and the impact of monetary policy changes, particularly sharp rises in interest rates. The mapping of these risks is illuminating and aids understanding.

Mortgage Design, Repayment Schedules, and Household Borrowing

How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% less borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that new mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs.

Job polarisation and household borrowing

AbstractThe last few decades have seen transformative changes to the structure of employment, which have led to a deterioration in demand for middle-skill occupations, a process known as job polarisation. As demand for middle-skill workers shrinks, expectations about households’ income through their lifetime horizon must be adjusted. It is possible that these expectations loop back into the credit system and affect the lending behaviour of credit institutions or that they impact households’ self-assessment of their opportunities to borrow money. In this paper we study how the process of job polarisation affects credit demand and supply, studying its relationship with credit constraint and credit quality.

Impact of the Kuroda Bazooka on Japanese households’ borrowing intentions

This study examines the impact of a monetary policy by the Bank of Japan on households’ willingness to borrow, that was announced on October 31, 2014. This policy, known as Kuroda Bazooka, was not anticipated by the private sector; therefore, it could be regarded as an exogenous shock. To estimate the effects of the Kuroda Bazooka, this study used interrupted time series analysis, a technique often used in medicine, but not yet widely used in economics. The analysis of the data before and after the shock shows that the Kuroda Bazooka increased household borrowing intentions by approximately 10 %. This result suggests that although there was not much change in households’ aggregate borrowing, there was a change in their intention to borrow. Therefore, a monetary policy that merely changes expectations may not be effective.

Borrowing and Spending in the Money: Debt Substitution and the Cash-out Refinance Channel of Monetary Policy

We show that the strong negative effect of higher mortgage rates on cash-out refinancing reflects substitution into other borrowing products, not large changes in total new household borrowing. We exploit an exogenous increase in long-term rates to show that, in the cross-section of outstanding mortgage rates, changes in cash-out and alternative borrowing are offsetting. Additionally, we instrument using monetary policy surprises to show that, over the period from 2006-2021, changes in cash-out refinancing are offset by alternative borrowing. Our results suggest that debt substitution substantially weakens the cash-out refinance channel of monetary policy and reduces its path-dependence.

Over-indebtedness in Microfinance: Evidence From a Survey of Borrower Households From an Indian State

Based on a household survey of 210 borrowing households from the state of Tamil Nadu, India, we investigate the extent and determinants of over-indebtedness among microfinance borrowers. Our analysis based on logistic regression framework using three distinct measures of over-indebtedness shows that the extent of over-indebtedness among the borrowing households is relatively widespread. As regards the determinants, apart from the demographic factors, external and lender-related factors contribute more towards over-indebtedness rather than borrower-related factors. Within the lender-related factors informal sources of credit exert a much stronger influence on over-indebtedness than formal sources which includes microfinance. The above findings imply that the policy environment should facilitate easier access to formal sources such as microfinance, along with provision of social security schemes with a minimum guaranteed income and insurance coverage. JEL Codes: C93, C51, D14, D92, I31

How financially fragile can households become? Household borrowing, the welfare state, and macroeconomic resilience

How financially fragile can households become? Household borrowing, the welfare state, and macroeconomic resilience

Portfolio allocation and borrowing constraints

Using the US Survey of Consumer Finances, we explore the empirical relationship between borrowing constraints and financial portfolio allocation by American households. To help motivate our empirical analysis we initially draw insights from a mean-variance model of optimal portfolio allocation with three tradable asset classes defined by increasing risk, and establish a link between borrowing restrictions and portfolio allocation in the presence of background risk. Our main contribution, however, lies in estimating the role that borrowing constraints play in shaping households' financial portfolio allocation. This is achieved using an ordered fractional probit model. In addition to revealing the significant empirical role played by household borrowing constraints in determining portfolio allocation, our analysis helps us to resolve ambiguity surrounding the behaviour of the medium-risk asset in our motivational theoretical framework. Further, the empirical distribution of medium-risk assets is found to be remarkably similar to that for high-risk assets, suggesting the presence of a more general ‘risk puzzle’, which our borrowing constraints measures partially explain.

Determinants of household credit behavior of low-income households in Sri Lanka

The paper aims to achieve three objectives in relation to household borrowing behavior among low-income households in Sri Lanka. First, it attempts to understand the patterns of savings and credit behavior of households. Second, it identifies the underlying reasons for the credit demand of households. Third, it investigates the relative significance of demographic and other socioeconomic factors that influence the reasons for households’ credit demand. Primary data collected from 1,500 household units were utilized for the analysis. Thematic and multinominal logistic regression analyses were used to achieve objectives. The thematic analysis identified 533 household units in debt and has revealed eight reasons behind households’ borrowing decisions, with borrowing for housing renovations, investing and consumption being the top three reasons. The results of the multinominal regression analysis revealed that having children is the most influential demographic factor that lies behind most reasons. The paper concludes that only a few households have borrowing habits, and their borrowing purposes vary. Most are not used for productive investments, and having young dependents induces household borrowing decisions. Based on the outcome, the study suggests strengthening social assistance for households with young dependents to protect low-income families from indebtedness.

Religion and household borrowing: Evidence from China

This study investigates the effect of religious beliefs on household borrowing behaviors from theoretical and empirical perspectives using microdata from the China Family Panel Studies (CFPS). The empirical results reveal that religious beliefs significantly increase households’ willingness to borrow. After propensity score matching, panel-fixed effect, instrumental variables regression, and robustness checks, the positive relationship remained. The mechanism analysis revealed that religious beliefs promote household borrowing by enhancing social networks. The effect of religious beliefs on household borrowing is more significant in rural areas with low income and low cognitive ability, but mainly promotes informal household borrowing, indirectly providing evidence of the underlying mechanism. Thus, this study plays an important role in guiding residents to hold reasonable religious beliefs and highlights the role of informal institutions in promoting the smooth development of the lending market.

Economic Consequences of the Cost of Government Borrowing in European Transition Economies

Abstract Given the need of transition economies to fund the investments necessary for development partly through borrowing, this paper investigates empirically the economic consequences of the government cost of borrowing for European transition economies during the period 2003-2016. The investigation analyses the impact of sovereign borrowing costs, in turn, on interest rates on loans to businesses and households, on the growth rates of investment and consumption, and, ultimately, on general economic activity. By utilizing a panel VAR technique our results indicate that consequent upon a positive shock to the cost of sovereign borrowing, the cost of borrowing for loans to both Non-Financial Corporations (NFCs) and households increases. We find that the price transmission from government borrowing costs to the private sector is at play with respect not only to borrowing rates but also to macroeconomic activity at large. Following an increase in sovereign borrowing costs, we observe substantial negative responses in the growth rates of investment, household consumption, and GDP growth. Also, while a price of borrowing increase for NFCs is found to negatively affect investment, household consumption is unaffected by an increase in household borrowing rates. These findings have valuable policy implications for policymakers and stakeholders in transition economies. Specifically, the results suggest that efforts to reduce the cost of sovereign borrowing could have a positive impact on the economy by lowering borrowing costs for households and businesses, promoting investment and consumption, and ultimately boosting economic growth.

Does Household Borrowing Reduce the Trade Balance? Evidence from Developing and Developed Countries

We examine the dynamic impact of household borrowing on the trade balance using data from 32 developing countries and 36 developed countries over the 1980-2020 period. Our findings suggest that the impact of household borrowing on the trade balance is negative, both in the short and long run, but the effects are more pronounced in developing countries. Moreover, we find that for developing countries the negative effect of household borrowing on the trade balance is achieved via boosting imports. In developed countries, household borrowing stimulates both imports and exports, where the effect on imports is larger.

THE TRANSFORMATION OF RETAIL CREDIT FINANCING IN THE WAKE OF THE CRISES IN HUNGARY

The money abundance that preceded the 2008 crisis brought about a number of distortions in the value judgements of economic actors and their attitudes towards money. Unlimited liquidity generated a huge supply of credit, which all economic players exploited beyond their means. The crisis-induced downturn caused huge problems in the repayment of loans. Tens of thousands of families and businesses have faced problems in surviving, caused by increased credit burdens. As a consequence, attitudes towards credit changed significantly after the crisis. For the Hungarian households too, excessive borrowing before the crisis caused huge problems. In Hungary, the problem was not only with the volume of credit, but also with its denomination. The proliferation of foreign currency lending and the exchange rate risk that it entailed was a huge challenge for tens of thousands of families, which they could only overcome with state support. The aim of this study is to examine the borrowing of households in Hungary over a number of years, looking in particular at its composition and the types of credit. In this study, the analysis was based on the household stock data of the Hungarian National Bank. The aim of the work is to show the trends and changes in Hungarian household borrowing in the wake of the crises. The analysis reveals the effects of the crises, which can be reduced by increasing financial awareness. The study provides a good basis for strengthening the financial culture of Hungarian households, which areas limit future irresponsible borrowing and provide a good shield against crises in the financial field.

Labeled loans and human capital investments

Imperfect capital markets and commitment problems impede lumpy human capital investments. Labeled loans have been postulated as a potential solution to both constraints, but little is known about the role of the label in influencing investment choices in practice. We draw on a cluster randomized controlled trial in rural India to test predictions from a theoretical model, providing novel evidence that labeled microcredit is effective in influencing household borrowing and investment decisions and increasing take-up of a lumpy human capital investment, a toilet.

Household Borrowing and MPCs in Heterogeneous-Agent Models

Household Borrowing and MPCs in Heterogeneous-Agent Models

The nexus between households’ indebtedness and consumption: the role of gender, geographical area and income groups

PurposeThe persistent increase in household indebtedness is an alarming issue that is becoming a major concern for economists and governments in developing nations. Although household consumption is an essential source of economic growth, households’ failure to meet their financial obligations will be one of the causes of economic problems if the increase in consumption is largely financed by household borrowing. Therefore, this study aims to analyse the nexus between households’ indebtedness and consumption and the roles of household characteristics.Design/methodology/approachThis study uses a microdata set of the Household Expenditure and Income Survey in 2019, which contained a simple random sampling of 4,730 households.FindingsUsing a simultaneous equations model, our results show a negative nexus between households’ consumption and their indebtedness. We find that household savings and size have an indirect impact on the debt service ratio, while the assets and total debt repayment instalments indirectly influence household consumption. We also identify differences in the relationship between the gender of the household head, rural and urban locations and income groups in consumption and indebtedness.Research limitations/implicationsThe implication of this study is that governments should adopt several programmes to increase the awareness of household financial and debt management, especially for those in the low-income group.Originality/valueThis study contributes to the empirical literature by establishing a microeconomic perspective of consumption and an indebtedness model focusing on the differences in household characteristics in explaining consumption and indebtedness.

Financial or non-financial shocks: rivals that play together

AbstractThis paper estimates a model using Bayesian methods and data from the USA (1990Q1–2019Q2) to explore how the financial sector contributes to business cycles through banks’ asset channel and the quality of capital adequacy constraint. The paper shows that the contribution of financial and non-financial shocks varied before, during, and after the 2008 financial crisis; housing demand and asset price shocks are the main contributors, and the credit shocks are the most persistent. In addition, the paper presents the application of macroprudential tools, along with their impact on the economy in general, and on welfare in particular. The findings illustrate that the tools which control household borrowing ability, such as loan-to-value or debt-to-income ratios, do not impact welfare significantly. However, the impact of policies on the leveraged sector is substantial. The paper proposes macroprudential policies that allow policy-makers to stabilize the economy without changing welfare. Such policies, however, should be timely, targeted, and temporary; otherwise, they may cause disruptions.

Household debt, student loan forgiveness, and human capital investment: a neo-Kaleckian approach

This paper aims to analyze the sustainability of student debt in the US. For this purpose, I build a neo-Kaleckian model in which households can borrow to either consume or invest in human capital. Next, I calibrate the model using US data to simulate the economic effects of specific policies such as student loan forgiveness. To my knowledge, this is the first study that considers household borrowing for two different purposes, consumption and human capital accumulation, in a demand-led macro-modeling framework. The main findings are that (i) household debt is sustainable in the long run (i.e., the debt servicing is compatible with the long-term economic growth) for a consumption level greater than 90% of household income; (ii) new borrowing boosts short-term economic activity while having ambiguous long-term effects because of its outcomes to household indebtedness and debt servicing; and (iii) student loan cancelation has only short-run economic effects, whereas reducing loan interest rates and changing the eligibility criterion for student loan forgiveness result in long-term effects.

Household debt: An institutionalist perspective and empirical assessment

The paper deals with the empirical evidence on household borrowing behavior from an institutionalist perspective. Assuming close interconnections between the availability of credit and consumerist culture, we estimate the effects of precedence of consumption, status consumption, and “investment”-minded buying driven by debt pattern. We rely on official statistics on household debt, disposable income and spending since the early 2000s to 2020. The institution of precedence of consumption is measured through data on loans drawn by households, outstanding loans, loan payments, household consumption and disposable income. Corresponding metrics illustrate that debt-financed consumption has become a widespread scheme. Financialization rate is measured separately for retail sector and housing market. Households are becoming more dependent on loan payments, as we estimated for different income groups using the paymentto-income ratios. In case with car loans, these metrics serve as indirect evidence for the embeddedness of conspicuous motive. Evidence on housing loans suggests that “investment”-minded buying can hardly result in a short-term gain. Research findings show that the pattern of precedence of consumption feeds the socially induced motives of conspicuous waste and speculation. Causality can go the other way too. The novelty of our approach is that we integrate the discourse of financialization into the institutionalist perspective and combine the theoretical constructs of precedence of consumption, conspicuous waste and speculative motive, seen as the factors of debt dependence. We contribute to applied studies by introducing factual data on household debt and providing evidence of interplay between these factors. The research is relevant socially and economically in view of the connection between unsustainable household debt and consumerist culture.

The role of risk attitudes and expectations in household borrowing: evidence from Estonia

ABSTRACT This study investigates the role of risk attitudes and financial expectations in households’ borrowing behaviour. The central research question is whether risk aversion and optimistic expectations provide additional information beyond the main economic and sociodemographic characteristics in predicting applications for credit and the size of debt. The paper uses microdata from the Estonian Household Finance and Consumption Survey (HFCS) and estimates probit and Heckman models. My analysis shows that risk-tolerant households apply for loans more often than risk-averse households do and that their loans are larger. The variables describing the household's expectations for its future financial situation are on their own related to the decision to apply for a loan, but they do not contain any relevant additional information beyond the main economic and sociodemographic characteristics of the household.