Household Debt and Uncertainty: Private Consumption after the Great Recession

Household debt in many advanced economies has increased significantly since the 1980s and accelerated in the years before the Great Recession, resulting in an aggregate reduction of saving rates in the developed economies. Now, some of those economies are deleveraging, which may affect their recovery. We try to disentangle how these financial developments work for private consumption in a panel of OECD countries, after controlling for the traditional determinants (income, net financial and non-financial wealth and interest rates). We find that consistent with the perceived changes in the distribution of financial constrains across countries, aggregate consumption is also driven by the dynamics of housing debt accumulation and deleveraging. Precautionary savings, due to labor income uncertainty, have also influenced household decisions especially during the 2007-2009 period.