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Household debt and economic growth in Europe

Published online by Cambridge University Press:  11 April 2024

L. Barbaglia ,
S. Manzan  and
E. Tosetti
L. Barbaglia
Affiliation:
Joint Research Centre, European Commission, Ispra, Italy
S. Manzan*
Affiliation:
Bert W.Wasserman Department of Economics and Finance, Baruch College, New York, USA
E. Tosetti
Affiliation:
University of Padua, Padua, Italy
*
Corresponding author: Sebastiano Manzan; Email: sebastiano.manzan@baruch.cuny.edu
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Abstract

We investigate the role and impact of household debt on the economic performance of European economies during the double-dip recession of 2008–2013. We use a loan-level data set of millions of residential mortgages originated between 2000 and 2013 to calculate regional indicators of household debt. The granular information allows us to construct a measure of interest rate mispricing during the housing boom that we use to identify the effect of a credit shock (CS) on household debt. Our analysis provides three main conclusions. First, in the period 2004–2006, the measure of CS was negative in most European regions which indicates that credit conditions were significantly relaxed relative to earlier years. Second, we find that regions in which household leverage increased more rapidly during the 2002–2007 period experienced a more severe decline in output and employment after 2008. Third, we find that the CS had the largest effect on increasing leverage for the low-income and the middle-income households, although the leverage of the high-income households represents a more powerful predictor of the decline in economic activity.

Keywords

Household debtgreat recessionEuropean economyMonetary Union
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 19
Copyright
© The Author(s), 2024. Published by Cambridge University Press

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