Research On The U.S. Household Debt And Its Macroeconomic Effects

The explosive growth of U.S. household debt since the beginning of 21st century has driven more and more attention towards the economic effects of household debt, and the 2007-2009 U.S. financial crisis has raised even more questions about the rising indebtedness. As the foundation of the U.S. debt pyramid, household debt is closely accompanied by the fast-growing consumption, which in combination has become the most important driving power of U.S. economy. However, the rising household debt also poses great uncertainty and risks on macro-economy. Therefore, profound research on the history, determinants, macroeconomic implications of household debt and its influence in financial crisis is necessary to further understand the relations between household debt and U.S. financial system, to analyze the U.S. economic driving power and developing patterns, and to plot the U.S. economic reforms in post-crisis times. Furthermore, a comprehensive study of U.S. household debt can help understand the evolving process of consumer credit and household debt in China.This paper dwells on the issue of household debt, applying the theories in household consumption and investment decision, macro-economy and financial development and using methods such as statistical analysis, empirical analysis and dynamic stochastic general equilibrium model. This paper has summarized the history and characteristics of household debt, analyzed the co-movement between household debt and consumption, focused mainly on the micro determining mechanism and macroeconomic effects of household debt, and at last explained the part household debt played in 2007-2009 financial crisis and U.S. debt-economy developing patterns.The findings of this paper are as follows. First, consumption-income motive and housing-finance motive are the basic incentives for household borrowing. Empirical studies show that, sky-rocketing house prices, increasing house ownership and growing asset securitization are the most important sources for the unprecedented growth in household debt since 1970s. The low interest rate policy of FED and low expectation of future income by most households also contribute to the rising indebtedness. Secondly, the co-movement between U.S. household debt and consumption coincides with the U.S. business cycles. The co-movement demonstrates different characteristics in economic peaks and troughs. In times of expansion, the co-moving becomes more outstanding, while in contraction, the relationship becomes obviously weaker. Thirdly, financial frictions and the double functions of housing are the causes of household debts'macroeconomic effects, i.e. the household financial accelerator mechanism. The interaction between house price, household borrowing leverage, external borrowing premium, and mortgage equity withdrawal is key to the household financial accelerator mechanism. Household borrowing leverage would enlarge the initial impact, and then the connections between household sector and macro-econorny would further transmit the impact. The household financial accelerator mechanism is pro-cyclical, which makes the business cycles fluctuate more fiercely and sustain much longer. Fourthly, the rising household debt and leverage, together with the contraction in consumption expenditure and housing investment, show that the 2007-2009 financial crisis is consumer-led, which in fact reflects the deeper problems in U.S. modern financial development and debt-economy patterns. Household debt is the base of the U.S. debt- economy mode, which at the same time has posed great threats on U.S. economy. Last but not the least, debt governance will be the inevitable adjustment for the U.S. in post-crisis times, which will involve changes in household consumption behavior and cultures, and macroeconomic reforms in consumer finance innovation and protection.Based on the existing researches, this paper presents some innovative improvement in analytical perspective, calculative models and empirical methods. First, this paper has chosen a relatively new subject about U.S. household debt and its possible effects, which would be supplement and extension to the research on U.S. economy. Second, this paper constructs the model of financial accelerator in household sector, including household debt as an independent variable in the general equilibrium analysis, and introduces new assumptions about the double functions of housing and consumer behavior, which thus has built up a calculative and simulative analytical model for further research on household borrowing. Thirdly, this paper has adopted the logistic smooth transition regression, which can differentiate the transition of economic states by threshold indicators, to analyze the co-movement of household debt and consumption. Furthermore, this paper has applied VAR method, co-integration test and vector error correction models to explore the influences of various determinants of household debt, such as income expectations, consumption expenditure price index, housing prices, interest rate, housing ownership and financial innovation.