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Higher household debt is associated with lower future GDP growth in a broad set of 80 countries over the period 1950–2016. Several institutional factors, such as flexible exchange rates, capital account openness, higher financial development and inclusion, mitigate this negative relationship. Three mutually reinforcing mechanisms help explain this relationship. First, increases in household debt amplify the probability of future banking crises, which significantly disrupts financial intermediation. Second, crash risk may be systematically neglected due to investors’ overoptimistic expectations associated with household debt booms. Third, debt overhang impairs household consumption when negative shocks hit.
Older adults, household debt, GDP growth
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All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2019 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 25 September 2019