Low Interest Rates and the Distribution of Household Debt

53 Pages Posted: 22 Mar 2021 Last revised: 13 Apr 2021

See all articles by Marina Emiris

Marina Emiris

National Bank of Belgium - Research Department

Francois Koulischer

University of Luxembourg

Date Written: April 13, 2021


We study how changes in interest rates affect the borrowing of households and the distribution of debt within the population. In a model of household borrowing with credit constraints and endogenous house prices, we show that less constrained households with more pre-existing housing wealth increase their borrowing most when interest rates fall. We then use unique loan level data on the universe of household credit in Belgium to document a shift in the distribution of debt over age, with older households borrowing more as interest rates fell in the last decade. First-time borrowers, who are more likely to be constrained, do not contribute to the rise in household debt. To identify the elasticity of household debt to the interest rate, we use regulatory data on foreign exposures of banks and on the location of bank branches. We find that a 1 percentage point fall in the interest rate is associated with a 15% growth in household debt.

Keywords: Interest Rates, Household Debt, Mortgages, Credit Constraints

JEL Classification: D14, E43, E58, G51

Suggested Citation

Emiris, Marina and Koulischer, Francois, Low Interest Rates and the Distribution of Household Debt (April 13, 2021). Available at SSRN: https://ssrn.com/abstract=3805839 or http://dx.doi.org/10.2139/ssrn.3805839

Marina Emiris

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000

Francois Koulischer (Contact Author)

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi

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