Macroeconomic implications of household debt

This dissertation studies the macroeconomic implications of household debt theoretically and empirically. In chapter 2, new ground is broken by incorporating both corporate and consumer debt in a neo-Kaleckian macro model. To this end, a more realistic consumption function of the workers is introduced. The study shows that consumer debt enhances the stability of macroeconomic system because it provides an additional source of consumption. An increase in the consumer credit constraint parameter expands the stable region in the phase diagram. The model was further extended by incorporating an endogenous retention ratio. This extended model could depict the emergence of macroeconomic crisis. A downswing of the state of confidence to a negative level or upswing of interest and rentiers' saving rates may create complete macroeconomic instability. The replicated empirical results of Palley (1994) and Schmitt (2000) were presented in chapter 4. Palley's regression framework was also extended in this chapter. To account for structural change due to financial liberalization, we have divided the sample at the fourth quarter of 1982. In the autoregressive distributed lag regression analysis for pre-1982, we found no evidence that the household debt variables had any negative effect on output. However, there is some evidence that the household debt variables have negative effects on output for the post-1982 period. In chapter 5, multi-equation econometric frameworks were used to investigate the impact of debt on aggregate performance in US. In the vector autoregression analysis capturing the transitory feedback effects, we observed a bidirectional positive feedback process between aggregate income and debt. According to the estimation of vector error correction models, there are negative long-run relationships between household debt and output. The empirical model has also been extended to include investment and corporate debt. The results are in contrast with the results of empirical model without corporate sector variables. The negative long-run relationship between household debt and GDP ceases to exist as shown by the positive cointegrating coefficients in the cointegrating equations. Impulse response functions from these extended empirical models also indicate that investment may be an important channel through which household debt affects output.