Household Debt's Impact On Economic Growth, Determinants and Signal To Systemic Banking Crises
The rapid increase in household debt has raised concerns over its influence on economic growth since it has proven to be detrimental to growth. Extensive empirical evidence shows that the unfavourable household debt-growth nexus is driven by a surge in house prices. Nevertheless, very few studies ha...
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| Summary: | The rapid increase in household debt has raised concerns over its influence on economic growth since it has proven to be detrimental to growth. Extensive empirical evidence shows that the unfavourable household debt-growth nexus is driven by a surge in house prices. Nevertheless, very few studies have focused on the link between household debt and growth was led by the supply side (financial development), which indirectly leads to banking crises. Due to the downside risk integral in the supply side through the role of household debt and growth, the scenario signals the role of household debt as an indicator in the Early Warning Signal (EWS) model for systemic banking crises. This study aims to discuss the issue of household debt as well as its cause and impact on economic stability in three aspects: debt-growth nexus, the determinants of household debt, and the probability of systemic banking crises. The objectives of this study are, first, to examine the impact of household debt on growth and second, to investigate the role of institutional quality in the growth model. Third, this study seeks to discuss the role of financial development as a catalyst to household debt. Finally, the study aims to investigate the role of household debt as an indicator in the EWS for predicting the probability of systemic banking crises. This study analysed 43 countries of advanced and emerging economies for the period from 1980 to 2018 by employing a bias-corrected Least Square Dummy Variable (LSDVC) estimator and the logit regression method. The main empirical findings are a negative association between household debt and economic growth, while institutional quality has a weak positive effect on growth. Notably, the evidence shows that the negative effect of household debt on growth is stronger at a lower level of institutional quality. The results also reveal financial development as an important variable in determining the household debt accumulation. Hence, the results indirectly highlight that the rapid build-up of household debt arising from financial development has an inherent risk leading to economic instability. This study finds household debt is a significant indicator for the EWS of systemic banking crises. The findings suggest the growing influence of financial development as a leading cause of the detrimental effect of household debt on growth and in increasing the probability of crises. Nevertheless, the negative effect of household debt on growth can be reduced through the conditional role of institutional quality. Also, the findings of the study found that the relationship between household debt and growth is stronger and increases the probability of banking crises for advanced economies, but not for emerging economies. Hence, this study provides a broad practical understanding that will assist scholars and policymakers in finding ways to avoid the harmful effect of debt on growth in the future. Besides, this study offers an informative guideline for policymakers in designing suitable policies that suit countries’ characteristics in ensuring a favorable effect of debt in sustaining economic stability. In particular, the findings are expected to assist central banks and other government authorities in monitoring the accessibility and size of financial institutions and the relevant institutional settings in ensuring the positive effect of household debt on growth. Thus, the results are expected to be beneficial in alerting the government to be more cautious of any unexpected change in debt and prepared for the downside risk so that the risk could be managed properly. Future studies may consider alternative proxies for institutions and explore using different estimator methods. |
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