Do households with debt cut back their consumption more? New evidence from the UK

Abstract

© 2021 The Authors. We investigate whether the debt position of UK households affects the response of consumer spending to income and wealth changes. We construct a novel esti- mate of spending on non-durables to track the same households over time for an ex- tended period ranging from 1993 to 2017. Using this series, we explore how house- hold indebtedness propagates negative and positive income and wealth changes to consumption responses. We assess whether negative and positive shocks imply the same consumption adjustments and whether such mechanism is crisis-specific. Our results indicate that falls in income trigger substantially larger adjustments in con- sumption than income rises for households with debt, while the findings for wealth are less conclusive. The effects are strongest for households with larger debt-service burdens. These effects are not specific to the financial crisis period.