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How does household debt affect financial asset holdings? Evidence from euro area countries

Merike Kukk (Department of Finance and Economics, Tallinn University of Technology, Tallinn, Estonia, and Economics and Research Department, Eesti Pank, Tallinn, Estonia)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 5 June 2017




The paper aims to investigate the impact of financial liabilities on households’ holdings of financial assets. The debt-to-income ratio of the household sector increased from 75 per cent in 2000 to 99 per cent in 2010 in the euro area on average, and the rapid accumulation of household debt has induced the need to study how indebtedness affects the behaviour of households beyond their borrowing decisions.


The paper uses the first wave of the Household Finance and Consumption Survey from 2009-2010 covering euro area countries. The paper estimates a system of equations for households’ financial liabilities and assets, taking account of endogeneity and selection bias.


The results indicate that higher household liabilities are related to lower holdings of financial assets. The results are confirmed by a large number of robustness tests. The findings support the hypothesis that credit availability reduces precautionary savings as income shocks can be smoothed by borrowing, meaning fewer assets are held for self-insurance against consumption risk.

Practical implications

The results are obtained from a recession period when households faced aggregate shocks, whereas credit constraints were tighter than during good times. The implications of lower incentives to keep financial assets by indebted households is that they are actually more vulnerable to aggregate shocks, as they have fewer resources available when they are hit by a negative shock.


This is the first paper to investigate the effect of liabilities on financial assets using household level data. The paper takes a holistic view and models financial assets and liabilities jointly while controlling for endogeneity and selection bias.



The author would like to thank the participants in seminars at Eesti Pank and Tallinn University of Technology, EMS 2014, and the IISES 9th Academic Conference, anonymous referees, Karsten Staehr and Tairi Rõõm for their valuable comments. This work was supported by Base Financing grant no. B45/2015. The results published and the related observations and analysis may not correspond to the results or analysis of the data producers.


Kukk, M. (2017), "How does household debt affect financial asset holdings? Evidence from euro area countries", Studies in Economics and Finance, Vol. 34 No. 2, pp. 194-212.



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