Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis
- American Economic Review (Forthcoming)
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.
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