Household Borrowing During a Creditless Recovery

Abstract

We investigate the factors behind the borrowing of households during a creditless recovery. We use data from a typical creditless recovery case—Estonia during the aftermath of the global financial crisis. Cross-sectional data on households’ assets, liabilities, income, expectations, and intention to use credit in 2001–10 and 2012 are employed. The results indicate that two-thirds of the sluggish recovery in credit demand can be explained by changes in household endowments such as income reduction and lower income expectations, while one-third remains unexplained and is ascribed to changes in behavioral relations. It is noted that the share of credit-constrained households was very high during the creditless recovery period.

KEY WORDS:

• business cycle
• creditless recovery
• household borrowing
• micro evidence
• Oaxaca-Blinder decomposition

Acknowledgments

The views expressed are those of the author and do not necessarily represent the official views of the Bank of Estonia. The author thanks Robin Hazlehurst, Jana Kask, Merike Kukk, Martti Randveer, Tairi Rõõm, Karsten Staehr, Lenno Uusküla, and the anonymous reviewers and participants of the Estonian Economic Society conference 2012 and the Bank of Estonia open seminar 2012 for their insightful comments and Jaana Helm and Taavi Raudsaar for providing the data. Any errors remain the responsibility of the author.

Notes

^1. The recovery in Hungary coincided with an institutional change in the banking sector, which might have had an effect on credit deepening. The government established a substantial levy on financial institutions so that the European Bank for Reconstruction and Development (EBRD) downgraded Hungary’s transition indicator on financial institutions (EBRD: Structural and institutional change indicators [2010]).

^2. Loans include real estate collateralized and other secured loans. Lease purchases are capital rents, mostly used to pay for cars. Hire purchases are used for small consumer goods purchases. Hire purchases are also called instalment plan purchases.

^3. We do not aim to differentiate between new borrowers and already indebted households in this article, but this is a relevant direction for further studies. If the same regressions are run for the subsample of indebted households, the relationship between debt service ratio and credit demand turns negative for all the credit types except credit card purchases. The other coefficients are only slightly affected.

Additional information

Funding

The financial support from Estonian Science Foundation grants no. 8311 and IUT20-49 is acknowledged.