IDEAS home Printed from https://ideas.repec.org/p/bcl/bclwop/bclwp173.html
   My bibliography  Save this paper

Household indebtedness and their vulnerability to rising interest rates

Author

Listed:
  • Gaston Giordana
  • Michael H. Ziegelmeyer

Abstract

High inflation and rising interest rates could increase financial vulnerability among Luxembourg households, who tend to carry significant debt. This paper uses micro-data on individual households from the Luxembourg Household Finance and Consumption Survey (HFCS) to identify pockets of financial vulnerability across the resident population. We calculate seven standard debt burden indicators and simulate their evolution through the end of 2023 based on BCL macroeconomic projections. According to several indicators, the share of financially vulnerable households increased from 2018 to 2021. Our simulations suggest this trend continued in 2022 and 2023 for those indicators that focus on the risk of delayed payment, although it may have reverted for other indicators that focus on the level of debt. Risk is concentrated among low-income households, but indebted households in this group only account for 11% of the number of mortgage contracts and 9% of aggregate household sector debt.

Suggested Citation

  • Gaston Giordana & Michael H. Ziegelmeyer, 2023. "Household indebtedness and their vulnerability to rising interest rates," BCL working papers 173, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp173
    as

    Download full text from publisher

    File URL: https://www.bcl.lu/en/publications/Working-papers/173/BCLWP173.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gaston Giordana & Michael Ziegelmeyer, 2017. "Household debt burden and financial vulnerability in Luxembourg," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Data needs and Statistics compilation for macroprudential analysis, volume 46, Bank for International Settlements.
    2. Morell, Joe & Shaw, Frances & Lyons, Paul & McCann, Fergal, 2022. "Rising interest rates and higher inflation: implications for the banking sector," Financial Stability Notes 15/FS/22, Central Bank of Ireland.
    3. Ms. Laura Valderrama & Patrik Gorse & Ms. Marina Marinkov & Petia Topalova, 2023. "European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options," IMF Working Papers 2023/076, International Monetary Fund.
    4. Dieckelmann, Daniel & Metzler, Julian, 2022. "Household inequality and financial stability risks: exploring the impact of changes in consumer prices and interest rates," Financial Stability Review, European Central Bank, vol. 2.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thomas Y. Mathä & Ana Montes-Viñas & Giuseppe Pulina & Michael Ziegelmeyer, 2023. "The Luxembourg Household Finance and Consumption Survey: Results from the fourth wave in 2021," BCL working papers 176, Central Bank of Luxembourg.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giordana, Gastón & Ziegelmeyer, Michael, 2020. "Stress testing household balance sheets in Luxembourg," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 115-138.
    2. Øystein Bortne & Jone Bjornestad & Mads Nordmo Arnestad & Tore Tjora & Kolbjørn Kallesten Brønnick, 2024. "The role of persuasion by significant others and engagement in bank-switching intention," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 29(4), pages 1279-1290, December.
    3. Juan Mariscal-Cáceres & Carmen Cristófol-Rodríguez & Luis Manuel Cerdá-Suárez, 2024. "Regulatory Implications of the Supervision and Management of Liquidity Risk: An Analysis of Recent Developments in Spanish Financial Institutions," JRFM, MDPI, vol. 17(2), pages 1-22, January.
    4. Emambakhsh, Tina & Fuchs, Maximilian & Kördel, Simon & Kouratzoglou, Charalampos & Lelli, Chiara & Pizzeghello, Riccardo & Salleo, Carmelo & Spaggiari, Martina, 2023. "The Road to Paris: stress testing the transition towards a net-zero economy," Occasional Paper Series 328, European Central Bank.
    5. Gaston Giordana & Michael Ziegelmeyer, 2024. "Using household-level data to guide borrower-based macro-prudential policy," Empirical Economics, Springer, vol. 66(2), pages 785-827, February.
    6. Rim, Jongseok, 2024. "Comparative dynamics of housing finance: A cross-country analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 94(C).
    7. François Koulischer & Pauline Perray & Thi Thu Huyen Tran, 2022. "COVID-19 and the Mortgage Market in Luxembourg," JRFM, MDPI, vol. 15(3), pages 1-24, March.
    8. Damjanović, Milan & Lenarčič, Črt, 2023. "Constructing a house price misalignment indicator: revisited and revamped," MPRA Paper 118489, University Library of Munich, Germany.
    9. Giuseppe Pulina, 2023. "Consumer debt in Luxembourg and the euro area: Evidence from the Household Finance and Consumption Survey," BCL working papers 175, Central Bank of Luxembourg.
    10. Adhikari, Tamanna & McGeever, Niall, 2023. "How resilient are Irish SMEs to input cost inflation?," Financial Stability Notes 6/FS/23, Central Bank of Ireland.
    11. Yiwen Chen & Thomas Y. Mathä & Giuseppe Pulina & Barbara Schuster & Michael Ziegelmeyer, 2020. "The Luxembourg Household Finance Consumption Survey: Results from the third wave," BCL working papers 142, Central Bank of Luxembourg.
    12. Nicolas Albacete & Pirmin Fessler & Peter Lindner, 2018. "One policy to rule them all? On the effectiveness of LTV, DTI and DSTI ratio limits as macroprudential policy tools," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 35, pages 67-83.

    More about this item

    Keywords

    Household debt; Financial vulnerability; Interest rates; Micro-simulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcl:bclwop:bclwp173. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bclgvlu.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.