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  5. Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis

  • Emil Verner
  • Győző Gyöngyösi
American Economic Review
vol. 110, no. 9, September 2020
(pp. 2667–2702)
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Abstract

We examine the consequences of a sudden increase in household debt burdens by exploiting variation in exposure to household foreign currency debt during Hungary's late-2008 currency crisis. The revaluation of debt burdens causes higher default rates and a collapse in spending. These responses lead to a worse local recession, driven by a decline in local demand, and negative spillover effects on nearby borrowers without foreign currency debt. The estimates translate into an output multiplier on higher debt service of 1.67. The impact of debt revaluation is particularly severe when foreign currency debt is concentrated on household, rather than firm, balance sheets.

Citation

Verner, Emil, and Győző Gyöngyösi. 2020. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis." American Economic Review, 110 (9): 2667–2702. DOI: 10.1257/aer.20181585

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E32 Business Fluctuations; Cycles
  • F34 International Lending and Debt Problems
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth