Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in Australia

• The "debt-overhang hypothesis" - that households cut back more on their spending in a crisiswhen they have higher levels of outstanding mortgage debt (Dynan, 2012) - seems to be taken forgranted by macroprudential authorities in several countries in their policy decisions, as well as bythe international organizations that evaluate and comment on countries' macroprudential policy.New results for Australian microdata are presented that reject the debt-overhang hypothesis. Theresults instead support the "spending-normalization hypothesis" of Andersen, Duus, and Jensen(2016), what can also be called the "debt-financed overspending" hypothesis - that the correlationbetween high pre-crisis household indebtedness and subsequent spending cuts during the crisisreflects high debt-financed spending pre-crisis and a return to normal spending during the crisis.As discussed in Svensson (2019, 2020), this is consistent with the above correlation reflectingdebt-financed overspending through what Muellbauer (2012) calls the "housing-collateralhousehold demand" channel and Mian and Sufii (2018) the "debt-driven household demand"channel.

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SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

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