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.
| Original language | English |
|---|---|
| Pages (from-to) | 2667-2702 |
| Number of pages | 36 |
| Journal | American economic review |
| Volume | 110 |
| Issue number | 9 |
| DOIs | |
| Publication status | Published - Sept 2020 |
| Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2020 American Economic Association. All rights reserved.
Funding
*Verner: Sloan School of Management, Massachusetts Institute of Technology (email: [email protected]); Gyöngyösi: Kiel Institute for the World Economy, and National Bank of Hungary (email: [email protected]). Emi Nakamura was the coeditor for this article. This research received financial support from the Alfred P. Sloan Foundation through the NBER Household Finance small grant program. We are extremely grateful to Atif Mian, Mark Aguiar, Adrien Matray, Motohiro Yogo, and Wei Xiong for valuable guidance and encouragement. For helpful comments, we thank three anonymous referees, Adrien Auclert, Tamás Briglevics, Markus Brunnermeier, Will Dobbie, Sergio de Ferra, Bo Honoré, Oleg Itskhoki, Nobu Kiyotaki, Stefan Lewellen, Ben Moll, Dmitry Mukhin, Karsten Müller, Mikkel Plagborg-Møller, Dániel Palotai, Jonathan Parker, Judit Rariga, Federico Ravenna, Michala Riis-Vestergaard, Eyno Rots, Jesse Schreger, Chris Sims, Amir Sufi, Adrien Verdelhan, Gianluca Violante, Ben Young, and seminar participants at various conferences and seminars. We thank Ádám Szeidl for sharing CEU’s establishment location dataset, Elisabeth Beckman and the Austrian Central Bank for sharing the Euro Survey data, and János Köllo˝ and MTA KRTK Databank for sharing the T-Star data. Réka Zempléni provided excellent research assistance. The views in this paper are solely those of the authors and do not necessarily reflect the views of the National Bank of Hungary.