DISCUSSION OF:
HOUSEHOLD DEBT AND BUSINESS CYCLES
WORLDWIDE
BY MIAN, SUFI AND VERNER
Emi Nakamura
Columbia University
December 2015
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Could a credit boom sow seeds ofdestruction for the macroeconomy?
COMPLETE MARKETS BENCHMARK
Households borrow to smooth consumption
High borrowing presages high growth (and low current income)
Aguiar and Gopinath (JPE, 2007)
High expected growth leads to CA deficits
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INCOMPLETE MARKETS
Households are borrowing constrained
High borrowing when borrowing limits expandEndogenous: High output implies greater collateral
e.g., Midrigan and Philippon (2011)
Exogenous: Shocks to credit supply
e.g. Eggertsson & Krugman (2012); Korinek & Simsek (2015)This paper!
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MAIN EMPIRICAL RESULT
(1) (2) VARIABLES Growth GDP Growth GDP Lag HHD Growth -0.349*** -0.351*** (0.0707) (0.0706) Lag NFD Growth -0.0186 (0.0287) Constant 9.810*** 9.956*** (0.305) (0.305) Observations 709 699 R-squared 0.408 0.416
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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GDP GROWTH (T TO T+3) VS. HHD GROWTH (T-4 TO T)
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PRECURSOR: JORDA, SCHULARICK AND TAYLOR (2011)
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PRECURSOR: JORDA, SCHULARICK AND TAYLOR (2014)
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MY COMMENTS
Robustness
Endogenous vs. exogenous credit
Extending the sample
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ROBUSTNESS
(1) (2) (3) VARIABLES Growth GDP Growth GDP Growth GDP Lag HHD Growth -0.349*** -0.266*** -0.232*** (0.0707) (0.0785) (0.0812) Trend -0.185*** (0.0547) Constant 9.810*** 377.7*** 7.058*** (0.305) (109.0) (1.226) Year FE No No Yes Observations 709 709 709 R-squared 0.408 0.474 0.650
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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CORRELATION COMES FROM LOW GROWTH PERIODS
(1) (2) VARIABLES Baseline >2% Growth over 3 Years Lag HHD Growth -0.349*** -0.0825 (0.0707) (0.0546) Trend -0.140** (0.0565) Constant 9.810*** 290.3** (0.305) (112.4) Observations 709 602 R-squared 0.408 0.469
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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GDP GROWTH (T TO T+3) VS. HHD GROWTH (T-4 TO T)
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ONLY > 2% GROWTH OVER 3 YEARS
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ENDOGENOUS VS. EXOGENOUS CREDIT
Mian et. al argue a credit boom is destructive
But what if credit expands with Y
...And Y is mean-reverting
Implies:
Expansion in credit (and Y) today associated with future Y decline
But there is nothing “bad” about the credit growth
Can this explain the data?
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NOT REALLY...
(1) (2) VARIABLES GDP Growth GDP Growth Lag HHD Growth -0.349*** -0.343*** (0.0707) (0.0645) Lag GDP Growth -0.0352 (0.127) Constant 9.810*** 10.13*** (0.305) (1.326) Observations 709 709 R-squared 0.408 0.409
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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DO EXOGENOUS CREDIT SHOCKS EXPLAIN DATA?
Eggertsson & Krugman (2012); Korinek & Simsek (2015):
Credit expansion leads to boom
Subsequent credit contraction leads to bust
Would expect effect of lagged credit on output to occur via effect on current
credit
Do we see this in the data?
....Not quite
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CONTROLLING FOR CURRENT CREDIT GROWTH
(1) (2) (3) VARIABLES GDP Growth GDP Growth GDP Growth Lag HHD Growth -0.349*** -0.361*** (0.0707) (0.0716) Curr. HHD Growth 0.140** 0.106 (0.0669) (0.0786) Constant 9.810*** 8.124*** 9.385*** (0.305) (0.293) (0.414) Observations 709 835 709 R-squared 0.408 0.321 0.416
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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CONTEMPORANEOUS OUTPUT VS. CREDIT GROWTH
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FIRST VS. SECOND DERIVATIVES
Lagged credit growth appears to have a negative effect on futuregrowth even controlling for current credit growth
Negative effect of credit boom not just a consequence of future credit bust
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DYNAMICS OF DEBT VS. OUTPUT
(1) (2) VARIABLES Output Dynamics Debt Dynamics Lag HHD Growth -0.349*** 0.116* (0.0707) (0.0644) Constant 9.810*** 4.025*** (0.305) (0.278) Observations 709 709 R-squared 0.408 0.209
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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FIRST VS. SECOND DERIVATIVES
Lagged credit growth appears to have a negative effect on futuregrowth even controlling for current credit growth
Negative effect of credit boom not just a consequence of future credit bust
Credit keeps rising after positive credit shock (albeit at a slower rate)
Nevertheless, output contracts
Need a story where slowdown in credit growth causes recession
(Kermani, 2012)
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EXPANDING THE SAMPLE PERIOD
Relatively short sample period for many countries
Median country <20 yrs data
Limitation: Household debt data
But...Mian et al. also consider IV for household debt
Instrument: Spread on 10-yr bonds vs. US
Much longer time series available
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REGRESSIONS USING SOVEREIGN SPREADS
(1) (2) (3) VARIABLES IV
Baseline OLS
Baseline >=1965
Lag HHD Growth -0.650*** (0.240) 10-Yr Bond Spread vs. US 0.626*** 0.0865 (0.180) (0.179) Trend -0.200*** (0.0302) Constant 10.91*** -4.604*** 408.3*** (0.820) (0.0195) (60.57) Observations 557 557 892 R-squared 0.221 0.230 0.327
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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RESULTS USING LONGER SAMPLE PERIOD
IV analysis suggests increase in spreads leads to lower growth due to
contraction in credit
Reduced form: Higher spreads yield lower future growth
Can run reduced form on larger sample back to 1965
Effect much weaker
Different effect of household debt historically?
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CONCLUSIONS
Robustness
Key role of big recessions
Endogenous vs. exogenous credit
Controlling for current credit doesn’t kill effect of lagged credit
It should in simple models
Extending the sample
Yield spread effects go away for older data
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