Household Debt and Business Cycles Worldwide

Household Debt and Business Cycles Worldwide

Atif Mian, Amir Sufi, and Emil Verner

Princeton University, University of Chicago and Princeton University

June 2016

Motivation: Household Debt and Output Growth

I With frictions such as real rigidities, nominal rigidities, and/ormonetary policy constraints, a rise in household debt canlower subsequent output growth

I Empirical: Mian and Sufi (2014), IMF (2012)I Theoretical: Eggertsson and Krugman (2012), Guerrieri and

Lorenzoni (2015), Farhi and Werning (2015), Huo andRıos-Rull (2016) Korinek and Simsek (2014), Martin andPhilippon (2014), and Schmitt-Grohe and Uribe (2015)

I Most empirical evidence limited to the Great Recession

I In a sample of 30 countries from 1960 to 2012, we show a risein household debt in medium-run predicts decline insubsequent output growth and an increase in unemployment

I A rise in global household debt predicts a decline in globaloutput growth, highlighting importance of trade linkages

Increase in Household Debt Predicts Lower Growth

Rise in Global Household Debt ⇒ Lower Global Growth

What Model Best Fits the Facts?

I Results contradict standard open economy model in which risein debt reflects better future income prospects

I Results consistent with “demand shock with friction” models

I Rise in household debt associated with consumption boomand influx of consumption goods from abroad

I Heterogeneity consistent with importance of rigidities relatedto exchange rates: negative predictive relation stronger in fixedexchange rate regimes

I Effect is non-linear with larger increases in household debtcausing even bigger declines in subsequent output growth

I Instrument household debt with sovereign spreads to isolatenegative impact of credit-supply driven debt booms onsubsequent output growth

What is New?

I Long panel country studies: Jorda et al (2013, 2014),Schularick and Taylor (2012), Dell’Ariccia et al (2012),Cecchetti, et al (2011), Krishnamurthy and Muir (2015)

I We present a number of new results to this literature:I Previous research focuses on credit growth and recession

severity conditional on a recession; we are first to estimateunconditional relation between household debt increase ansubsequent output growth

I Separate predictive power of household versus firm debtI We examine the components of GDP and of imports during

the household debt boom and bustI Instrumental variables estimates, and heterogeneity by

exchange rate regimeI Global debt cycle, analysis of forecasting errors by IMF and

OECD, and panel VAR evidence

Outline

Data and Summary Statistics

Conceptual Framework and Estimation

Basic Result and Robustness

Alternative Explanations

Support for Demand Shock with Friction Models

The Global Household Debt Cycle

Conclusion

Data

I Unbalanced panel of 30 mainly OECD countries, 1960-2012

I Annual, 900 country-years

I Credit series (BIS)I Total credit to private non-financial sector, PD = HHD + FD

I Credit to households, HHDI Credit to non-financial firms, FD

I Credit = loans and debt securities

I National accounts data, professional economic forecasts,micro trade data from standard sources

Countries in SampleCountry Years Average ∆(HHD/Y ) Average ∆(FD/Y ) Std. dev. ∆(HHD/Y ) Std. dev. ∆(FD/Y )

Australia 1977-2012 2.23 1.00 2.55 4.40Austria 1995-2012 0.71 1.98 1.26 2.91Belgium 1980-2012 0.82 3.09 1.13 6.47Canada 1969-2012 1.42 1.00 2.37 3.54Czech Republic 1995-2012 1.24 -0.85 1.71 5.46Denmark 1994-2012 3.72 2.52 3.96 5.96Finland 1970-2012 1.12 0.87 3.04 7.55France 1977-2012 1.08 1.10 1.20 2.41Germany 1970-2012 0.51 0.23 1.79 1.65Greece 1994-2012 3.22 1.98 2.25 2.43Hong Kong 1990-2012 1.21 1.88 2.68 10.40Hungary 1989-2012 0.52 2.06 3.41 5.34Indonesia 2001-2012 0.96 -0.22 0.77 1.83Ireland 2002-2012 5.02 14.11 7.97 15.63Italy 1960-2012 0.70 0.52 1.55 2.98Japan 1964-2012 0.92 0.14 1.77 4.39Korea, Rep. 1962-2012 1.71 1.74 2.22 5.83Mexico 1994-2012 0.20 -1.07 0.86 2.12Netherlands 1990-2012 3.62 0.95 2.75 4.10Norway 1975-2012 1.17 1.37 3.42 5.89Poland 1995-2012 1.91 1.37 2.03 2.59Portugal 1979-2012 2.57 1.18 2.51 7.22Singapore 1991-2012 1.78 -0.21 2.88 5.28Spain 1980-2012 1.78 1.64 2.64 5.01Sweden 1980-2012 1.11 3.66 2.66 8.47Switzerland 1999-2012 0.95 0.76 3.27 4.01Thailand 1991-2012 1.99 -0.85 3.32 7.86Turkey 1986-2012 0.72 0.66 1.19 3.51United Kingdom 1976-2012 1.38 1.66 2.43 4.27United States 1960-2012 0.75 0.54 2.14 1.76

Summary Statistics

N Mean Median SD SDSD(∆y) Ser. Cor.

∆y 695 2.90 3.08 2.98 1.00 0.29∆3y 695 8.40 8.65 6.56 2.21 0.71∆(PD/Y ) 695 3.11 2.52 6.96 2.34 0.39∆3(PD/Y ) 695 8.52 7.28 16.04 5.39 0.74∆(HHD/Y ) 695 1.62 1.33 2.56 0.86 0.43∆3(HHD/Y ) 695 4.58 3.68 6.24 2.10 0.79∆(FD/Y ) 695 1.48 1.04 5.66 1.90 0.30∆3(FD/Y ) 695 3.89 3.11 12.21 4.10 0.69∆c 678 2.81 2.90 2.84 0.95 0.33∆cdur 405 4.17 4.66 8.20 2.76 0.23∆cnondur 405 1.18 1.39 1.79 0.60 0.29∆C/Y 688 -0.06 0.00 1.18 0.40 0.05∆i 678 2.66 3.67 10.79 3.63 0.15∆g 688 2.84 2.60 2.79 0.94 0.26∆x 695 8.64 9.30 12.29 4.13 0.15∆m 695 8.08 9.55 13.87 4.66 0.12∆NX/Y 695 0.14 -0.01 2.11 0.71 0.03∆CA/Y 648 0.08 -0.02 2.29 0.77 -0.01∆sXC 695 -0.15 -0.07 1.80 0.61 0.04∆sMC 695 0.16 0.15 1.67 0.56 0.00∆reer 614 -0.03 0.59 6.75 2.27 0.05∆u 669 0.08 -0.01 1.08 0.36 0.34∆3u 662 0.19 -0.01 2.43 0.82 0.67∆3y

WEOt+3|t 484 9.41 8.60 3.76 1.26 0.50

∆3(yt+3 − yWEOt+3|t ) 484 -2.53 -1.79 5.35 1.80 0.54

∆3hpi 514 6.56 7.16 17.42 5.85 0.72∆3(GD/Y ) 627 1.73 1.16 9.92 3.33 0.71spr 547 1.14 0.66 2.43 0.82 0.66Avg HYS, t-3 to t-1 46 22.18 20.78 13.47 4.53 0.89

Outline







Conclusion

Benchmark Model: Future Productivity Shocks

What does theory say about the relation between increases inprivate debt and subsequent output growth?

I Standard open economy model where borrowing governedby PIH implies rise in debt presages higher growth (e.g.,Aguiar and Gopinath (2007))

I Fundamental source of variation: productivity or permanentincome shocks

I Private debt plays two roles:

1. borrow to invest or consume given higher future productivity2. smooth out transitory shocks

I Either way, borrowing precedes higher growth

Alternative: Excessive Debt and Demand Shocks

I Models with demand shocks + frictions imply oppositerelation: rise in debt predicts lower growth

I Three key differences relative to benchmark

1. Expansion in debt and subsequent reversal driven by shocksto credit supply or risk premia, not productivity shocks

2. Frictions such as nominal or real rigidities translate borrowingand spending into changes in output

3. Borrowing can be excessive from social planner’s perspectivebecause borrowers do not take into account negative effect ofcut-back in spending during bust

I Fundamental source of variation is credit supply shocks, anddecline in output happens even if future credit tighteningperfectly forecastable!

Excessive Debt, Demand Shocks, and Frictions

I Nominal rigidities with monetary policy constraints:Eggertsson and Krugman (2012), Guerrieri and Lorenzoni(2015), Farhi and Werning (2015), Korinek and Simsek(2014), Martin and Philippon (2014), and Schmitt-Grohe andUribe (2015)

I Real rigidities: Huo and Rıos-Rull (2016)

I Pecuniary externalities associated with debt financing:Shleifer and Vishny (1992), Kiyotaki and Moore (1997),Lorenzoni (2008), Davila (2015)

I Macro-behavioral models: Laibson (1997), Barro (1999),Gennaioli, Shleifer, and Vishny (2012)

Empirical Methodology

I Jorda (2005) local projections for horizon h = 1, 2, . . .

yit+h−yit = αhi +βhHH∆3

(HHD

Y

)it−1

+βhF∆3

(FD

Y

)it−1

+X ′itΓ+εit ,

I Advantages: (i) Does not constrain the shape of the IRF (ii)Can be more parsimonious

I Use ∆ debt to GDP to capture meaningful changes in debt

I Add lagged dependent variables, other controls (with lags)

I Time fixed effects introduced in context of “global factors”

I Standard errors clustered at country level

I Show robustness to standard SVAR

What is Time Horizon for a Debt Boom?

I Let the data speak using auto-regressive empirical model

I Shock to household/firm debt persists for 3-4 years

Outline







Conclusion

Rise in Household Debt Predicts Lower Subsequent Growth

yit+h − yit = αhi + βhHH∆3

HHDit−1

Yit−1+ βhF∆3

FDit−1

Yit−1+ εit ,

Rise in Household Debt Predicts Lower Subsequent Growth

Dependent variable: ∆3yit+3

(1) (2) (3) (4) (5) (6)

∆3(PD/Y )it−1 -0.119∗∗

(0.0297)

∆3(HHD/Y )it−1 -0.366∗∗ -0.337∗∗ -0.333∗∗ -0.340∗∗

(0.0691) (0.0675) (0.0641) (0.0722)

∆3(FD/Y )it−1 -0.0978∗ -0.0411 -0.0464 -0.0235(0.0363) (0.0328) (0.0332) (0.0387)

∆3(GD/Y )it−1 0.0534(0.0441)

R2 0.087 0.123 0.036 0.128 0.131 0.126Country Fixed Effects X X X X X XDistributed lag in ∆y X XObservations 695 695 695 695 695 627

Subsamples and Robustness

Dependent variable: ∆3yit+3

(1) (2) (3) (4) (5) (6) (7) (8) (9)FE

OLSFE

OLSFE

OLSFE

OLSFE

OLSFE

OLSArellano-

Bond GMM OLSFE

OLS

∆3(HHD/Y )it−1 -0.371∗∗ -0.236∗ -0.355∗∗ -0.211∗∗ -0.325∗∗ -0.319∗∗ -0.324∗∗ -0.312∗∗

(0.0796) (0.0891) (0.105) (0.0644) (0.0650) (0.0709) (0.0721) (0.0668)

∆3(FD/Y )it−1 -0.0275 -0.0693 0.000131 -0.0571 -0.0500 -0.0573 -0.0686 -0.0629(0.0373) (0.0698) (0.0645) (0.0339) (0.0343) (0.0392) (0.0460) (0.0409)

(∆3HHDit−1)/Yit−4 -0.298∗∗

(0.0640)

(∆3FDit−1)/Yit−4 0.0202(0.0320)

R2 0.165 0.106 0.127 0.080 0.179 0.154 0.182 0.152Country Fixed Effects X X X X X X XLagged ∆y controls X X X X X X X X XSample Developed Emerging Pre 1990 Pre 2000 Post 1980 Non-overl. Non-overl. Full FullObservations 529 166 227 436 617 233 203 695 695

β3HH for Each Country in Sample

3-Variable VAR Cumulative Effect Impulse Responses

Rise in Household Debt → Higher Unemployment

Full Sample Subsamples

(1) (2) (3) (4) (5)∆3uit+3 ∆3uit+3 ∆3uit+3 ∆3uit+3 ∆3uit+3

∆3(PD/Y )it−1 0.0605∗∗

(0.0138)

∆3(HHD/Y )it−1 0.132∗∗ 0.105∗∗ 0.133∗∗ 0.150∗∗

(0.0320) (0.0313) (0.0460) (0.0409)

∆3(FD/Y )it−1 0.0363∗∗ 0.0373∗∗ 0.0377+ 0.0491∗∗

(0.0129) (0.0121) (0.0190) (0.0170)

∆uit−1 -0.343∗∗

(0.114)

∆uit−2 -0.236∗∗

(0.0806)

∆uit−3 -0.292∗

(0.117)

R2 0.119 0.145 0.207 0.121 0.183Country Fixed Effects X X X X XSample Full Full Full Pre 2000 OECD Harm.Observations 662 662 638 410 527

Outline







Conclusion

Alternative Explanations?

I A nuanced productivity shock story? Mean reverting shocks?I Distributed lagged output controls don’t affect estimateI GDP growth actually positively auto-correlated in sampleI Asymmetry of household and firm debt results

I Some omitted variable not seen by us? Rise in household debtpredicts IMF and OECD forecast errors

I Over-optimism in general? Not mutually exclusive, butforecasters are not overly optimistic prior to boom

I Robustness to other predictors?I Country-specific time trends, RER appreciation (Gourinchas

and Obstfeld 2012), net foreign debt, corporate credit spreads

I House prices?I Strong positive correlation between HHD and HPI Here we don’t take strong stand on causationI House price growth also predicts growth slowdown, but

household debt is more robust

Household Debt Expansions and Professional Forecasts

yForecastit+h|t − yit = αhi + βhHH∆3

HHDit−1

Yit−1+ βhF∆3

FDit−1

Yit−1+ εit ,

HH Debt Expansions and Professional Forecast Errors

HH Debt Expansions and Professional Forecast Errors

Growth Forecast Forecast Error et+h|t and Forecast Revision revt+2|t,t+1

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)∆2y

IMFt+2|t ∆2y

OECDt+2|t e IMF

t+1|t e IMFt+2|t e IMF

t+3|t eOECDt+1|t eOECD

t+2|t e IMFt+1|t eOECD

t+1|t revOECDt+2|t,t+1

∆3(HHD/Y )it−1 0.0016 0.0013 -0.060∗∗ -0.17∗∗ -0.31∗∗ -0.070∗∗ -0.17∗∗ -0.068+ -0.060∗∗ -0.031∗∗

(0.025) (0.022) (0.018) (0.043) (0.073) (0.013) (0.038) (0.033) (0.018) (0.0090)

∆3(FD/Y )it−1 -0.029∗ -0.041∗ -0.019+ -0.026 -0.031 -0.013 -0.0084 -0.018 -0.013 -0.014∗∗

(0.013) (0.015) (0.010) (0.025) (0.037) (0.0090) (0.020) (0.011) (0.0092) (0.0041)

∆3(HHD/Y )it−1 × 1t>2000 0.00080 -0.019(0.035) (0.029)

1t>2000 0.27 0.073(0.24) (0.34)

R2 0.034 0.064 0.026 0.063 0.132 0.040 0.073 0.029 0.041 0.049Country Fixed Effects X X X X X X X X X XObservations 484 471 590 484 484 594 471 590 594 462

Is Over-optimism Fueling Boom?

∆hyIMFit−5+h|t−5 = αh

i + βhHH∆3HHDit−1

Yit−1+ βhF∆3

FDit−1

Yit−1+ εit

Outline







Conclusion

Results Supporting Demand Shock with Friction Models

I Non-linearity in basic result, already shown

I Debt increase finances a consumption boom, imports ofconsumption goods increase substantially

I Heterogeneity by exchange rate regime and zero lower boundconstraint exposure

I Instrumental variables specification isolating credit supplyshocks

Household Debt Finances Consumption Booms

I HH debt expansion associated with higher consumption shareof output, worsening external balance, and rising share ofconsumer goods in imports

(1) (2) (3) (4) (5) (6)

∆1CY it

∆1NXY it

∆1CAY it

∆1sMCit ∆1s

XCit ∆1reerit

∆1(HHD/Y )it 0.120∗∗ -0.173∗ -0.185∗ 0.152∗∗ 0.0371 0.153(0.0402) (0.0665) (0.0843) (0.0361) (0.0326) (0.130)

∆1(FD/Y )it 0.0249+ -0.0167 -0.0125 -0.0261 -0.0400+ -0.235∗

(0.0126) (0.0205) (0.0186) (0.0167) (0.0204) (0.100)

R2 0.082 0.041 0.037 0.042 0.013 0.030Country Fixed Effects X X X X X XObservations 688 695 648 695 695 614

All Components of GDP During Boom

I It is not just durable consumption, and investment share ofGDP doesn’t even rise!

(1) (2) (3) (4) (5) (6) (7)

∆1CY it

∆1Cdur

Y it∆1

Cnondur

Y it∆1

C services

Y it∆1

IY it

∆1GY it

∆1NXY it

∆1(HHD/Y )it 0.120∗∗ 0.0266∗∗ 0.0448∗∗ 0.0763∗∗ 0.0174 0.0621∗∗ -0.173∗

(0.0402) (0.00630) (0.0130) (0.0195) (0.0545) (0.0188) (0.0665)

∆1(FD/Y )it 0.0249+ -0.0128∗∗ 0.0210∗∗ 0.0198∗∗ -0.0194 0.0149+ -0.0167(0.0126) (0.00330) (0.00607) (0.00516) (0.0271) (0.00744) (0.0205)

R2 0.082 0.051 0.142 0.147 0.002 0.065 0.041Country Fixed Effects X X X X X X XObservations 688 409 409 409 688 695 695

Heterogeneity across Exchange Rate RegimesI Result strongest among fixed exchange rate regimes

Heterogeneity across Exchange Rate Regimes

I Result strongest among fixed exchange rate regimes, and ZLBepisodes within floating

Fixed Intermediate Freely floatingFreely floating

excl. JapanNet foreign

borrower

(1) (2) (3) (4) (5) (6) (7)∆3yit+3 ∆3yit+3 ∆3yit+3 ∆3yit+3 ∆3yit+3 ∆3yit+3 ∆3yit+3

∆3(HHD/Y )it−1 -0.53∗∗ -0.31∗∗ -0.067 0.016 -0.24 -0.16 -0.19+

(0.14) (0.062) (0.16) (0.10) (0.21) (0.15) (0.098)

∆3(FD/Y )it−1 -0.11∗ -0.012 0.052 0.074 -0.15∗ -0.13+ -0.050(0.054) (0.040) (0.13) (0.13) (0.026) (0.045) (0.036)

∆3(HHD/Y )it−1 × ZLB -0.59∗ -0.72∗∗

(0.21) (0.080)

∆3(HHD/Y )it−1 × 1∆3NFDit−1>0 -0.23(0.14)

R2 0.281 0.114 0.032 0.088 0.367 0.487 0.181Country Fixed Effects X X X X X X XDistributed lag in ∆y X X X X X X XObservations 222 342 120 120 88 88 636

Credit Spread as an Instrument

∆dit = αfi + βf ∗ zit + ufit (1)

∆yi ,t+h = αsi + βs ∗∆dit + usit (2)

I Country spread sprit−4 as proxy for foreign credit supply

I Stories: increase in international investors’ risk appetite;savings glut; decline in currency risk (e.g. introduction ofEuro)

I A reduction in spread should be good news from afundamentals perspective.

I We also do a US specific IV strategy based on variation in highyield debt issuance share (Greenwood and Hanson (2013))

Credit Spread as Instrument: The Eurozone

Credit Spread as an Instrument

Eurozone Case Full Sample: Nominal Spread Full Sample: Real Spread

(1) (2) (3) (4) (5) (6) (7) (8)

∆02−07HHDY i

∆07−10yi ∆3HHDY it−1

∆3yit+3 ∆3yIMFt−1|t−4 ∆3

HHDY it−1

∆3yit+3 ∆3yIMFt−1|t−4

∆96−99spri -11.66∗∗

(3.428)

∆02−07(HHD/Y )i -0.222∗∗

(0.0479)

∆3(HHD/Y )it−1 -0.475∗ -0.577∗

(0.225) (0.279)

sprnominalit−4 -0.731∗∗ 0.0794

(0.167) (0.149)

sprit−4 -0.669∗ 0.0584(0.246) (0.109)

πit−4 -0.108 0.250∗ -0.506∗∗ 0.221∗∗

(0.109) (0.0983) (0.176) (0.0839)

R2 0.526 0.480 0.119 0.335 0.006 0.120 0.303 0.002Country Fixed Effects X X X X X XDistributed Lag in ∆y X X X XFirst Stage F-statistic 11.6 19.2 7.4Observations 12 12 546 546 334 546 546 334

Outline







Conclusion


I Analysis of components of GDP reveal that increase in netexports, driven by decline in imports of consumption goods,helps cushion the blow to GDP, especially for more openeconomies

I But what happens if all countries experiencing a debthang-over at the same time?

I We find:I Countries with a household debt cycle more correlated with

global household debt cycle see worse growth after increase inhousehold debt

I Global rise in household debt reduces scope for “exporting outof downturn”

I Recent changes in global household debt matter for eachcountry – an economic interpretation of time fixed effects

I This generates a strong global household debt cycle

Net Exports Help Cushion Blow

I Domestic components

(1) (2) (3) (4) (5) (6) (7)

∆3cit+3 ∆3CY it+3

∆3sCdurit+3 ∆3c

durit+3 ∆3c

nondurit+3 ∆3iit+3 ∆3git+3

∆3(HHD/Y )it−1 -0.33∗∗ 0.032 -0.11∗∗ -1.38∗∗ -0.17+ -1.21∗∗ -0.018(0.061) (0.028) (0.017) (0.27) (0.086) (0.23) (0.058)

∆3(FD/Y )it−1 -0.030 0.011 0.0039 -0.087 -0.032 -0.13 -0.056∗

(0.032) (0.013) (0.0081) (0.12) (0.025) (0.099) (0.023)

R2 0.106 0.015 0.232 0.217 0.057 0.154 0.018Country Fixed Effects X X X X X X XObservations 679 690 405 405 405 679 687

I External components

(1) (2) (3) (4) (5) (6) (7)∆3NXit+3

Yit∆3 ln Xit+3

Mit+3

∆3Xit+3

Yit

∆3Mit+3

Yit∆3s

MCt+3

∆3NXit+3

Yit

∆3NXit+3

Yit

∆3(HHD/Y )it−1 0.17∗∗ 0.43∗∗ -0.097 -0.27∗ -0.064∗ 0.060 0.12∗

(0.045) (0.14) (0.092) (0.11) (0.027) (0.048) (0.052)

∆3(FD/Y )it−1 0.018 0.088 -0.028 -0.046 0.0045 0.025+ 0.017(0.015) (0.053) (0.060) (0.058) (0.014) (0.012) (0.018)

∆3(HHD/Y )it−1 × opennessi 0.16∗∗ 0.13∗∗

(0.030) (0.033)

R2 0.060 0.048 0.004 0.021 0.014 0.076 0.189Country Fixed Effects X X X X X X XYear Fixed Effects XObservations 695 695 695 695 695 695 695

Debt Expansions, Growth, and the Correlation with theGlobal Household Debt Cycle

∆3yit+3∆3NXit+3

Yit

(1) (2) (3) (4) (5)

∆3(HHD/Y )it−1 -0.222∗ -0.221∗∗ -0.216∗ -0.216∗ 0.249∗∗

(0.0975) (0.0693) (0.0904) (0.0880) (0.0421)

∆3(FD/Y )it−1 -0.0385 -0.0379 -0.0377 -0.0579∗ 0.0197(0.0330) (0.0298) (0.0309) (0.0268) (0.0140)

∆3(HHD/Y )it−1 × ρGlobali -0.333+ -0.0239 -0.0333 -0.216∗

(0.179) (0.173) (0.171) (0.0784)

Global−i∆3HHDY it−1

-0.718∗∗

(0.152)

R2 0.150 0.493 0.493 0.214 0.077Country Fixed Effects X X X X XYear Fixed Effects X XObservations 695 695 695 695 695

Correlation with World Household Debt Cycle

Corr

(∆3HHD

Y

)it

,1

N − 1

∑j 6=i

(∆3

HHD

Y

)jt

Rise in Global Household Debt ⇒ Lower Global Growth

Global Household and Firm Debt and Global Growth

Dependent variable: global average ∆3yt+3

(1) (2) (3) (4) (5) (6)

Global ∆3HHDY t−1

-1.094∗∗ -1.097∗∗ -0.971∗ -0.797∗∗ -0.966∗∗

(0.300) (0.311) (0.366) (0.239) (0.252)

Global ∆3FDY t−1

-0.103 0.00896 0.213 -0.201 -0.0756

(0.192) (0.177) (0.231) (0.122) (0.149)

Global ∆yt−1 0.341(0.244)

Global ∆yt−2 0.390+

(0.224)

Global ∆yt−3 0.477+

(0.258)

Sample Full Full Full Pre 2000 Post 1980 FullR2 .295 .007 .295 .146 .437 .471Observations 46 46 46 37 30 46

Outline







Conclusion

Conclusion

I Rise in household debt predicts subsequent decline in outputgrowth

I Unlikely to be explained by a productivity shock model, resultsmore consistent with models with credit supply shocks,demand-driven cycles with frictions, and excessive leverage

I Open questionsI What is the source of credit supply shocks? Monetary policy in

core countries? (Bruno and Shin (2014), Rey (2015))I What is the role of behavioral biases? Irrational movements in

credit supply? Households borrow too much because of flawedexpectations?

I What is the role of housing?I What is friction most relevant for translating demand shock

into output shock?

Additional Slides

Robustness to Alternative Right-Hand-Side WindowLengths and Timing Assumptions

Alternative window lengths forthe change in lagged debt to GDP

(column j refers to ∆j)GDP growth from t to t + h on the

change in debt to GDP from t − 3 to t

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)∆3yit+3 ∆3yit+3 ∆3yit+3 ∆3yit+3 ∆3yit+3 ∆1yit+1 ∆2yit+2 ∆3yit+3 ∆4yit+4 ∆5yit+5

∆j(HHD/Y )it−1 -0.471∗∗ -0.367∗∗ -0.333∗∗ -0.314∗∗ -0.289∗∗

(0.12) (0.074) (0.064) (0.063) (0.064)

∆j(FD/Y )it−1 -0.162∗∗ -0.0961∗∗ -0.0464 -0.00697 0.0226(0.045) (0.032) (0.033) (0.035) (0.037)

∆3(HHD/Y )it 0.00690 -0.0695+ -0.195∗∗ -0.342∗∗ -0.487∗∗

(0.020) (0.037) (0.052) (0.075) (0.099)

∆3(FD/Y )it -0.0512∗∗ -0.0856∗∗ -0.0951∗∗ -0.103∗ -0.0634(0.012) (0.023) (0.031) (0.040) (0.056)

R2 0.076 0.109 0.131 0.145 0.150 0.110 0.087 0.119 0.151 0.158Country Fixed Effects X X X X X X X X X XLagged ∆y controls X X X X X X X X X XObservations 695 695 695 665 635 755 725 695 665 635

Robustness to Other Known Predictors of GDP Growth

(1) (2) (3) (4) (5)∆3yit+3 ∆3yit+3 ∆3yit+3 ∆1yit+1 ∆3yit+3

∆3(HHD/Y )it−1 -0.316∗∗ -0.325∗∗ -0.207∗∗ -0.0418∗ -0.211∗∗

(0.0718) (0.0621) (0.0688) (0.0192) (0.0657)

∆3(FD/Y )it−1 -0.0333 -0.0519 -0.0603∗ -0.0279 -0.0506(0.0386) (0.0383) (0.0252) (0.0181) (0.0541)

∆3reerit−1 -0.0220(0.0395)

∆3(NFD/Y )it−1 0.00793(0.0473)

spr corpt -0.448∗ -0.223(0.198) (0.362)

spr corpt−1 0.394∗ 0.495(0.177) (0.366)

R2 0.120 0.168 0.443 0.108 0.107Country Fixed Effects X X X X XDistributed Lag in ∆y X X X X XCountry-specific Time Trends XObservations 606 636 695 394 370

House Prices, Household Debt, and GDP Growth

∆3yt+3 ∆3hpit−1 ∆3hpit+3 ∆3

(HHDY

)t+3

(1) (2) (3) (4) (5) (6) (7) (8) (9)

∆3hpit−1 -0.0892∗∗ -0.0607∗∗ -0.0688∗∗ -0.0513 -0.0288 0.107∗∗

(0.0225) (0.0206) (0.0215) (0.0331) (0.0226) (0.0223)

∆3(HHD/Y )it−1 -0.243∗∗ -0.241∗∗ -0.181∗∗ -0.179∗ 1.035∗∗ -1.087∗∗

(0.0627) (0.0690) (0.0572) (0.0779) (0.253) (0.215)

∆3(FD/Y )it−1 -0.0443 -0.0575 -0.104∗ -0.0348(0.0353) (0.0356) (0.0387) (0.0329)

∆yit−1 -0.0812 -0.261 -0.0303(0.191) (0.202) (0.173)

∆yit−2 -0.00588 0.00493 -0.00928(0.130) (0.122) (0.127)

∆yit−3 0.220 -0.0554 0.00291(0.153) (0.178) (0.136)

sprnominalit−4 -2.881∗∗

(0.605)

R2 0.091 0.175 0.184 0.203 0.502 0.109 0.090 0.116 0.092Country Fixed Effects X X X X X X X X XYear Fixed Effects XSample Full Full Full Pre 2000 Full Full Full Full FullObservations 514 514 514 341 514 514 447 531 514

Average U.S. High-yield Share between t − 3 to t − 1 asan Instrument for U.S. Credit Expansion

OLS First stage IV

(1) (2) (3) (4) (5) (6) (7)

∆3yit+3 ∆3PDY it−1

∆3HHDY it−1

∆3HHDY it−1

∆3yit+3 ∆3yit+3 ∆3yit+3

Avg HYS, t-3 to t-1 0.214∗∗ 0.167∗ 0.167∗

(0.0669) (0.0704) (0.0729)

∆3(PD/Y )it−1 -0.507+

(0.263)

∆3(HHD/Y )it−1 -0.441∗∗ -0.650∗ -0.644+

(0.158) (0.310) (0.333)

R2 .22 .234 .26 .273 .023 .17 .217Distributed Lag in ∆y X XF statistic 10.26 5.632 5.271Observations 46 46 46 46 46 46 46

Three-Year Increase in Household, Firm, and GovernmentDebt to GDP and Subsequent Growth

Japan Scatter Plot

Full 3-variable VAR Cumulative Impulse Responses

VAR with House Prices and Household Debt

Documents

Household Debt and Business Cycles Worldwide