Household balance sheets and economic crisis

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JEL classification

• Financial Institutions and Services: Government Policy and Regulation
• Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Bankruptcy; Liquidation

Keywords

aggregate consumption, credit cycle, household default, households’ distress, credit risk modelling, micro simulations, insolvency.

Abstract

In this paper, the impact of an economic downturn on the household sector is studied. Household budgets can be negatively affected by declines in nominal wages and increases in unemployment. This effect is tested for the small, open, emerging economy using the estimated macro model. As a result of a lack of individual data on household finances, micro data are simulated. It is clearly shown by the conducted analysis that there is a significant additional decline in consumption related to an increase in household default rates and unemployment. It is found that potential household insolvencies have important implica-tions for the financial system as well as for the macroeconomy.