US and European Household Debt and Credit Constraints

This paper uses micro data from four OECD countries (the United States, Spain, Italy, and the Netherlands), to assess the determinants of household debt holding and to investigate whether or not credit constraints are important for household debt holding. We extend the existing literature in important ways. First, we present comparative evidence for four countries at the micro level, where we rely on household panel data for two countries; we are thus able to control for unobserved heterogeneity via individual household effects and to track changes in household behaviour over time. Second, by making data across countries as comparable as possible, we can explore the importance of the differences in institutional settings for debt incidence, debt outstanding and credit constraints. We also explore the implications for debt holding from consumption models, including a numerically solved precautionary savings model. We find that inter-country differences are substantial and remain even after controlling for a host of observable characteristics. This points to institutional differences between the countries being important. Acknowledgements: This paper was written while the authors were visting the Finance and Consumption in the European Union Program at the European University Institute in Florence. We thank Finance and Consumption for their support and hospitality. Crook would also like to thank the Carnegie Trust for the Universities of Scotland for financial support for this research. We thank Rob Alessie, Richard Disney, Rob Euwals, Tullio Jappelli, Tansel Yilmazer, Ernesto Villanueva, seminar audiences at CPB The Hague, Universities of Copenhagen, Edinburgh, and Nottingham, and conference audiences at Vienna (European Economic Association), Florence, and Madrid for insightful comments. We thank Centerdata for providing Dutch panel data, and in particular Klaas de Vos for help with wealth data. Correspondence to: [email protected] and [email protected].