DISCUSSION OF:

HOUSEHOLD DEBT AND BUSINESS CYCLES

WORLDWIDE

BY MIAN, SUFI AND VERNER

Emi Nakamura

Columbia University

December 2015

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Could a credit boom sow seeds ofdestruction for the macroeconomy?

COMPLETE MARKETS BENCHMARK

Households borrow to smooth consumption

High borrowing presages high growth (and low current income)

Aguiar and Gopinath (JPE, 2007)

High expected growth leads to CA deficits

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INCOMPLETE MARKETS

Households are borrowing constrained

High borrowing when borrowing limits expandEndogenous: High output implies greater collateral

e.g., Midrigan and Philippon (2011)

Exogenous: Shocks to credit supply

e.g. Eggertsson & Krugman (2012); Korinek & Simsek (2015)This paper!

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MAIN EMPIRICAL RESULT

(1) (2) VARIABLES Growth GDP Growth GDP Lag HHD Growth -0.349*** -0.351*** (0.0707) (0.0706) Lag NFD Growth -0.0186 (0.0287) Constant 9.810*** 9.956*** (0.305) (0.305) Observations 709 699 R-squared 0.408 0.416

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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GDP GROWTH (T TO T+3) VS. HHD GROWTH (T-4 TO T)

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PRECURSOR: JORDA, SCHULARICK AND TAYLOR (2011)

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PRECURSOR: JORDA, SCHULARICK AND TAYLOR (2014)

 

 

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MY COMMENTS

Robustness

Endogenous vs. exogenous credit

Extending the sample

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ROBUSTNESS

(1) (2) (3) VARIABLES Growth GDP Growth GDP Growth GDP Lag HHD Growth -0.349*** -0.266*** -0.232*** (0.0707) (0.0785) (0.0812) Trend -0.185*** (0.0547) Constant 9.810*** 377.7*** 7.058*** (0.305) (109.0) (1.226) Year FE No No Yes Observations 709 709 709 R-squared 0.408 0.474 0.650

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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CORRELATION COMES FROM LOW GROWTH PERIODS

(1) (2) VARIABLES Baseline >2% Growth over 3 Years Lag HHD Growth -0.349*** -0.0825 (0.0707) (0.0546) Trend -0.140** (0.0565) Constant 9.810*** 290.3** (0.305) (112.4) Observations 709 602 R-squared 0.408 0.469

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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GDP GROWTH (T TO T+3) VS. HHD GROWTH (T-4 TO T)

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ONLY > 2% GROWTH OVER 3 YEARS

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ENDOGENOUS VS. EXOGENOUS CREDIT

Mian et. al argue a credit boom is destructive

But what if credit expands with Y

...And Y is mean-reverting

Implies:

Expansion in credit (and Y) today associated with future Y decline

But there is nothing “bad” about the credit growth

Can this explain the data?

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NOT REALLY...

(1) (2) VARIABLES GDP Growth GDP Growth Lag HHD Growth -0.349*** -0.343*** (0.0707) (0.0645) Lag GDP Growth -0.0352 (0.127) Constant 9.810*** 10.13*** (0.305) (1.326) Observations 709 709 R-squared 0.408 0.409

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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DO EXOGENOUS CREDIT SHOCKS EXPLAIN DATA?

Eggertsson & Krugman (2012); Korinek & Simsek (2015):

Credit expansion leads to boom

Subsequent credit contraction leads to bust

Would expect effect of lagged credit on output to occur via effect on current

credit

Do we see this in the data?

....Not quite

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CONTROLLING FOR CURRENT CREDIT GROWTH

(1) (2) (3) VARIABLES GDP Growth GDP Growth GDP Growth Lag HHD Growth -0.349*** -0.361*** (0.0707) (0.0716) Curr. HHD Growth 0.140** 0.106 (0.0669) (0.0786) Constant 9.810*** 8.124*** 9.385*** (0.305) (0.293) (0.414) Observations 709 835 709 R-squared 0.408 0.321 0.416

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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CONTEMPORANEOUS OUTPUT VS. CREDIT GROWTH

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FIRST VS. SECOND DERIVATIVES

Lagged credit growth appears to have a negative effect on futuregrowth even controlling for current credit growth

Negative effect of credit boom not just a consequence of future credit bust

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DYNAMICS OF DEBT VS. OUTPUT

(1) (2) VARIABLES Output Dynamics Debt Dynamics Lag HHD Growth -0.349*** 0.116* (0.0707) (0.0644) Constant 9.810*** 4.025*** (0.305) (0.278) Observations 709 709 R-squared 0.408 0.209

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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FIRST VS. SECOND DERIVATIVES

Lagged credit growth appears to have a negative effect on futuregrowth even controlling for current credit growth

Negative effect of credit boom not just a consequence of future credit bust

Credit keeps rising after positive credit shock (albeit at a slower rate)

Nevertheless, output contracts

Need a story where slowdown in credit growth causes recession

(Kermani, 2012)

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EXPANDING THE SAMPLE PERIOD

Relatively short sample period for many countries

Median country <20 yrs data

Limitation: Household debt data

But...Mian et al. also consider IV for household debt

Instrument: Spread on 10-yr bonds vs. US

Much longer time series available

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REGRESSIONS USING SOVEREIGN SPREADS

(1) (2) (3) VARIABLES IV

Baseline OLS

Baseline >=1965

Lag HHD Growth -0.650*** (0.240) 10-Yr Bond Spread vs. US 0.626*** 0.0865 (0.180) (0.179) Trend -0.200*** (0.0302) Constant 10.91*** -4.604*** 408.3*** (0.820) (0.0195) (60.57) Observations 557 557 892 R-squared 0.221 0.230 0.327

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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RESULTS USING LONGER SAMPLE PERIOD

IV analysis suggests increase in spreads leads to lower growth due to

contraction in credit

Reduced form: Higher spreads yield lower future growth

Can run reduced form on larger sample back to 1965

Effect much weaker

Different effect of household debt historically?

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CONCLUSIONS

Robustness

Key role of big recessions

Endogenous vs. exogenous credit

Controlling for current credit doesn’t kill effect of lagged credit

It should in simple models

Extending the sample

Yield spread effects go away for older data

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