Household Debt Overhang Did Hardly Cause a Larger Spending Fall During the Financial Crisis in Australia

The “debt-overhang hypothesis” – that households cut back more on their spending in a crisis when they have higher levels of outstanding mortgage debt (Dynan, 2012) seems to be taken for granted by macroprudential authorities several countries policy decisions, as well the international organizations evaluate and comment countries’ policy. Results are presented UK microdata reject debt-overhang hypothesis. results instead support “spending-normalization Andersen, Duus, Jensen (2016a), what can also called “debt-financed overspending” hypothesis correlation between high pre-crisis household indebtedness subsequent cuts during reflects debt-financed return normal crisis. As discussed Svensson (2019, 2020), this is consistent with reflecting overspending through Muellbauer (2012) calls “housing-collateral demand” Mian Sufi (2018) “debt-driven channel. thus spurious an example omitted-variable bias. A simple model shows consumption changes directly strongly positively correlated, whereas quite weakly negatively correlated. Importantly, contrast, examples show there no systematic relation or LTV ratios. lack robust ratios implies tests these hypotheses should generally not done regressions ratios. Institutional subscribers NBER working paper series, residents developing may download without additional charge at www.nber.org.