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Household leverage and consumption during the Great Depression

Household leverage and consumption during the Great Depression PurposeThe purpose of this study is to explore the impact of household leverage on consumption in Denmark during the Great Depression in the 1930s.Design/methodology/approachA range of consumption functions are estimated on the basis of household-level data from the Expenditure and Saving Survey of 1931.FindingsThe estimations show significant negative marginal effects of various measures of leverage on homeowners’ non-durable consumption. The magnitude of the estimated effects suggests that leverage contributed significantly to the economic downturn during the Great Depression by depressing consumer spending of homeowners.Practical implicationsGross debt levels of homeowners are not only of direct importance for financial stability but also have implications for macroeconomic stability, which again might affect the stability of the financial system. These findings seem to be in line with the focus on household leverage in the macroprudential oversight performed by regulators and central banks in many countries.Originality/valueThis paper is the first study of the leverage channel in the private consumption function using household micro data from the Great Depression. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Regulation and Compliance Emerald Publishing

Household leverage and consumption during the Great Depression

Journal of Financial Regulation and Compliance , Volume 26 (2): 13 – May 14, 2018

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1358-1988
DOI
10.1108/JFRC-03-2017-0035
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this study is to explore the impact of household leverage on consumption in Denmark during the Great Depression in the 1930s.Design/methodology/approachA range of consumption functions are estimated on the basis of household-level data from the Expenditure and Saving Survey of 1931.FindingsThe estimations show significant negative marginal effects of various measures of leverage on homeowners’ non-durable consumption. The magnitude of the estimated effects suggests that leverage contributed significantly to the economic downturn during the Great Depression by depressing consumer spending of homeowners.Practical implicationsGross debt levels of homeowners are not only of direct importance for financial stability but also have implications for macroeconomic stability, which again might affect the stability of the financial system. These findings seem to be in line with the focus on household leverage in the macroprudential oversight performed by regulators and central banks in many countries.Originality/valueThis paper is the first study of the leverage channel in the private consumption function using household micro data from the Great Depression.

Journal

Journal of Financial Regulation and ComplianceEmerald Publishing

Published: May 14, 2018

References