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Is household debt sustainable in Korea?

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  • Dongyeol Lee
  • Hyunjoon Lim

Abstract

This paper takes two different approaches to assess the sustainability of household debt in Korea. First, we identify marginal households whose debts are excessive and whose financial soundness is weak, and examine how much these household groups would grow should external shocks occur. This sensitivity analysis shows that the low-income brackets are highly exposed to rollover and default risks, and that a decline in housing prices is an important factor affecting the vulnerability of household debt. Furthermore, we employ a debt dynamics equation and a primary savings reaction function in order to derive the debt limit for each income quintile, and find that the sustainable debt ratio for each income quintile differs in line with the interest rate burden of the household sector, income fluctuations and savings capability. According to the results of this analysis, the first quintile at the bottom income level records debt ratios close to their debt limit, calling for urgent debt restructuring for this income class.

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  • Dongyeol Lee & Hyunjoon Lim, 2015. "Is household debt sustainable in Korea?," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 20(2), pages 224-242, April.
    • Handle: RePEc:taf:rjapxx:v:20:y:2015:i:2:p:224-242
    DOI: 10.1080/13547860.2014.940760
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    References listed on IDEAS

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    1. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    2. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    3. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
    4. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    5. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    6. Kim, Hyun Jeong & Lee, Dongyeol & Son, Jong Chil & Son, Min Kyu, 2014. "Household indebtedness in Korea: Its causes and sustainability," Japan and the World Economy, Elsevier, vol. 29(C), pages 59-76.
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    Cited by:

    1. Athiphat Muthitacharoen, 2016. "Gauging Households’ Debt Tolerance: Evidence from Thailand," Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 23(1), pages 59-74, June.
    2. Jong Chil Son & Hail Park, 2019. "U.S. Interest Rate and Household Debt Sustainability: The Case of Korea," Sustainability, MDPI, vol. 11(14), pages 1-16, July.
    3. Athiphat Muthitacharoen, 2015. "Gauging Households’ Debt Tolerance: Evidence from Thailand," PIER Discussion Papers 12., Puey Ungphakorn Institute for Economic Research, revised Dec 2015.

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