The Effect of Household Debt on Economic Growth in European Union: When is Household Debt “Too Much”?

Article Information
Journal: Business and Economics Research Journal
Title of Article: The Effect of Household Debt on Economic Growth in European Union: When is Household Debt “Too Much”?
Author(s): Zuhal Kurul
Volume: 12
Number: 2
Year: 2021
Page: 269-285
ISSN: 2619-9491
DOI Number: 10.20409/berj.2021.321
Abstract
This paper attempts to answer two questions by considering household debt developments in European Union over two decades. First, does the rise of household debt in European Union weaken economic growth? Second, if higher household debt weakens economic growth, when does it happen? In this study, we employ a dynamic panel threshold analysis by using data from 27 European Union countries over the period of 2005-2018. The findings reveal that the relationship between household debt and economic growth is nonlinear and the impact of household debt on economic growth is positive until the ratio of household debt in GDP reaches the level of 62%. However, the impact of household debt becomes negative once that threshold is exceeded. This study also examines the impact of household debt on consumption and the evidence shows that the higher levels of household debt crowd out consumption. The overall results of this study underline the critical role of household debt on economic growth and the risks of high indebtedness.

Keywords: European Union, Household Debt, Economic Growth, Consumption Growth, Dynamic Panel Threshold Model

JEL Classification: E21, E44, G51, C23

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