Durable and nondurable consumption responses to indebtedness shocks: A cross-country analysis

Abstract

Using a Panel-VAR model for 20 OECD countries from 2007Q3 to 2019Q4, we examine how durable and nondurable goods consumption responds to household indebtedness shocks. Our results indicate that durable good consumption responds more strongly and negatively to an indebtedness shock compared to nondurable consumption. Additionally, higher household indebtedness is associated with a decline in economic activity. These findings can inform policies aimed at mitigating the adverse effects of household indebtedness, particularly during periods of contractionary monetary policy, when higher interest rates increase debt service burdens and compromise future disposable income.