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Household indebtedness and their vulnerability to rising interest rates

Author

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  • 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
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    File URL: https://www.bcl.lu/en/publications/Working-papers/173/BCLWP173.pdf
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    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. 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.
    3. 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.
    4. 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.
    Full references (including those not matched with items on IDEAS)

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    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.

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    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

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