Household leverage and
consumption during the
Danmarks Nationalbank, Kobenhavn, Denmark
Purpose –The purpose of this study is to explore the impact of household leverage on consumption in
Denmarkduring the Great Depression in the 1930s.
Design/methodology/approach –A range of consumption functions are estimated on the basis of
household-leveldata from the Expenditure and Saving Survey of 1931.
Findings –The estimations show signiﬁcantnegative marginal effects of various measures of leverageon
homeowners’non-durable consumption. The magnitude of the estimated effects suggests that leverage
contributed signiﬁcantly to the economic downturn during the Great Depression by depressing consumer
Practical implications –Gross debt levels of homeownersare not only of direct importancefor ﬁnancial
stability but also haveimplications for macroeconomic stability, whichagain might affect the stability of the
ﬁnancial system. These ﬁndings seem to be in line with the focus on household leverage in the
macroprudentialoversight performed by regulators and centralbanks in many countries.
Originality/value –This paper is the ﬁrst study of the leverage channel in the private consumption
functionusing household micro data from the Great Depression.
Keywords Consumption, Household micro data, Great Depression, Leverage effect
Paper type Research paper
Several studies have pointed at excessive credit growth as one of the main factors causing
banking crises with deep economic downturns. Furthermore, economic recoveries after
banking crises seem to be slower than normal (Reinhart and Rogoff,2009a, 2009b;
Schularick and Taylor, 2012). The Great Recession that followed the most recent ﬁnancial
crisis has therefore created a renewed research interest in the basic determinants of
consumer spending at a householdlevel.
According to the canonical life-cycle theory, income and net wealth are the main drivers
of private consumption (Ando and Modigliani, 1963). However, a recent strand of micro
data-based studies has drawn attention to the role played by household leverage (Ogawa
and Wan, 2007;Mian and Suﬁ, 2011;Dynan,2012;Mian et al.,2013;Bunn and Rostom, 2016;
Choi and Son, 2016;Kukk, 2016). These analyses indicate that there might be a leverage
channel in the private consumption function in addition to the traditional income and net
wealth channels, at least during periods with banking crises. The implication of such a
channel is that leverage is not only of direct importance for ﬁnancial stability but also has
The author wishes to thank the reviewers for useful comments on a preliminary version of this
article. Views and conclusions expressed in this article are those of the author and do not necessarily
represent those of Danmarks Nationalbank. The author alone is responsible for any remaining errors.
Journalof Financial Regulation
Vol.26 No. 2, 2018
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