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Too much of a good thing? Households’ macroeconomic conditions and credit dynamics

Author

Listed:
  • Hodula Martin

    (48332 Czech National Bank, Financial Stability Department, Na Příkopě 864/28, 115 03, Prague, Czech Republic)

  • Malovaná Simona

    (48332 Czech National Bank, Financial Stability Department, Na Příkopě 864/28, 115 03, Prague, Czech Republic)

  • Frait Jan

    (48332 Czech National Bank, Financial Stability Department, Na Příkopě 864/28, 115 03, Prague, Czech Republic)

Abstract
Favorable macroeconomic conditions, accompanied by optimistic consumer confidence, can stimulate and shape households’ expectations in such a way that they gradually extrapolate the view of good times lasting “forever”. As a consequence, households can then be inclined to accept a much higher level of indebtedness – higher than they would be willing to take on if they were to correctly perceive a discontinuation of the positive trend in the future. This paper documents the empirical link between the macroeconomic conditions faced by households, the confidence of households as investors and consumers, and households’ demand for credit on a sample of 21 European countries. The well-known procyclicality of household credit is found to grow stronger when favorable macroeconomic conditions are met with optimistic consumer confidence. While household credit goes hand in hand with the improving economy during an economic upturn, it is found to be sticky on the way down. Estimates show that households tend to extrapolate recent and current macroeconomic trends to the future and over-estimate the persistence of favorable or adverse conditions.

Suggested Citation

  • Hodula Martin & Malovaná Simona & Frait Jan, 2022. "Too much of a good thing? Households’ macroeconomic conditions and credit dynamics," German Economic Review, De Gruyter, vol. 23(4), pages 529-566, December.
    • Handle: RePEc:bpj:germec:v:23:y:2022:i:4:p:529-566:n:3
    DOI: 10.1515/ger-2021-0033
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    Cited by:

    1. Gric, Zuzana & Ehrenbergerova, Dominika & Hodula, Martin, 2022. "The power of sentiment: Irrational beliefs of households and consumer loan dynamics," Journal of Financial Stability, Elsevier, vol. 59(C).

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    More about this item

    Keywords

    consumer confidence; extrapolative expectations; households’ indebtedness; macroeconomic conditions; panel data;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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