1/2016 Merike Kukk. Debt repayment problems: what are the implications for consumption?
Working Papers of Eesti Pank 01/2016
The paper investigates the impact of debt repayment problems on consumption using quarterly panel data from 2004–2011 from
Estonia, a euro area country. The results imply that arrears on debt lead to substantial short-term changes in consumption. Quarterly
consumption is on average 30 per cent lower in the quarter when an individual faces debt repayment problems. The longer
the problems last, the more severe the decline in consumption is. Although consumption recovers after the debt repayment problems are resolved, the increase is smaller than the original decline and consumption remains at a lower level than before the arrears emerged. The results suggest that the experience of debt repayment problems has severe consequences for consumption in the short term as well as in the longer term.
JEL Codes: E21, D14, E32, G21
Keywords: consumption volatility, indebtedness, debt repayment problems, duration of arrears
Corresponding author's e-mail address: merike.kukk [at] eestipank.ee
The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank, the Eurosystem or the IWH.