Household debt and consumption: A quantitative analysis based on household micro data for Japan

In this paper, we empirically examine how household debt influenced consumption during and after the financial bubble in Japan. To this end, we use micro data on households that are re-sampled from the National Survey of Family Income and Expenditure. In particular, we examine the effects of household debt on consumption by estimating consumption functions of total expenditure and of individual expenditure classified by type. Even after controlling for wealth effects, we find that the ratio of the debt associated with land and housing purchases to the market value of tangible assets had a significantly negative effect on consumption after the bubble burst. Moreover, we find that the debt-asset ratio had negative effects on expenditures on semi-durable and non-durable goods. (c) 2007 Elsevier Inc. All rights reserved.