View article

Household debt levels relative to GDP have risen rapidly in many countries over the past decade. We investigate the relationship between household debt and growth by employing a novel estimation technique proposed by (Chudik et al. in: Hill, Gonzalez-Rivera, Lee (eds) Advances in econometrics volume 36 essays in honour of Aman Ullah, Emerald Publishing, pp 85–135, 2016), which helps to separate short-run from long-run relationships. Using data for 54 economies over 1990‒2016, we show that an increase in household debt is associated with higher GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio predicts lower GDP growth in the long run by 0.1 percentage point. Moreover, the negative long-run relationship between household indebtedness and GDP growth intensifies as the household debt-to-GDP ratio exceeds …