Household Debt Revaluation & the Real Economy: Evidence from a Foreign Currency Debt Crisis

Finance

Speaker : Emil Verner

Buil. T - Room T104 

We examine the real economic consequences of a sudden increase in house-hold debt burdens by exploiting spatial variation in exposure to household foreign currency debt during Hungary's late-2008 currency crisis. The revaluation of debt burdens leads to higher default rates and a collapse in spending. These responses translate into a worse local recession and depressed house prices. A 10 point increase in debt-to-income raises the unemployment rate by 0.6 percentage points, driven by employment losses at non-exporting firms. Consistent with demand externalities of debt financing, regional foreign currency debt has negative spillovers on nearby borrowers without foreign currency debt.

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