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Household Debt and Economic Growth: Debt Service Matters

Author

Listed:
  • Cengiz Tunc

    (Central Bank of the Republic of Turkey)

  • Mustafa Kilinc

    (Central Bank of the Republic of Turkey)

Abstract

In this paper, we investigate the impact of household debt service burden on the economic growth of a sample of advanced countries over the short and medium run. Using data from the Bank for International Settlements (BIS) on debt service ratios, we find that the debt service burden reduces economic growth over both the short and medium run. This finding is in contrast to the effect of household debt level, which boosts economic growth in the short run while reducing it in the medium run as in Mian et al. (2017). We further find the same protracted negative influence of debt service burden on unemployment and household consumption. Therefore, our paper identifies a new debt market transmission channel, i.e., the ‘debt service channel’, on economic growth and demonstrates that this channel is quantitatively much stronger than the household debt level channel. When faced with a rise in the debt service burden, households need to adjust other variables in order to act within their budget constraints. The present results indicate that they decrease their consumption levels significantly, with adverse effects on economic output and employment.

Suggested Citation

  • Cengiz Tunc & Mustafa Kilinc, 2023. "Household Debt and Economic Growth: Debt Service Matters," Open Economies Review, Springer, vol. 34(1), pages 71-92, February.
    • Handle: RePEc:kap:openec:v:34:y:2023:i:1:d:10.1007_s11079-021-09659-x
    DOI: 10.1007/s11079-021-09659-x
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    References listed on IDEAS

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