“Too Much Debt Will Kill You”: Although Not in Central Europe, Yet

Abstract

We take an evidence-based approach and confirm that a high level of household debt is detrimental to consumption, disposable income, and hence economic growth in the medium term. Using a panel setting with both fixed and time effects, we isolate the effect of an excessive household debt level and show that an additional one percentage point could be associated with a 0.1% drag on GDP growth over the next three years. Although we confirm this relationship on a panel of advanced economies, we show that emerging economies such as Central and Eastern European economies, possess structural characteristics (a shallow capital market, less finance and more social cohesion) that so far prevents such a demand constraint from materializing.