Household Debt and Savings Decisions



In 1990 Japan faced a widespread balance sheet recession after the collapse of real estate and stock prices. Before 1990, the Japanese economy had a very high GDP growth, one of the world's highest registered national saving rates, a highly positive current account and a positive and increasing net international investment position (NIIP). At the same time that Japan was a strong saver and lender to the rest of the world, private balance sheets were escalating due to increasing asset prices at the same time that credit demand was on the rise. In hindsight the legal setting and the loosening of monetary policy and credit supply induced the appearance of asset bubbles in japan, albeit the positive economic environment.Interestingly, Denmark displays a resemblance to these macroeconomic and debt features of 1980's Japan at the household level. In this context, the recent escalation of Danish household debt together with the strong saving environment and net lending position may be a symptom of the existence of asset bubbles within the Danish economy. One feature of the Danish economic system that may be driving up both household's savings wealth and debt is the fact that quasi-mandatory contribution rates to occupational pension schemes are set at the collective wage bargaining process. The issue is related to the fact that pension contributions are uniformly applied to heterogeneous households, at the same time that stored pension wealth is illiquid. As there is no mechanism for a household to correct their collective agreement saving rate, two cases may arise at this point: One, some households may be over-saving according to their preferences; Second, households may prefer to save in higher risk/yield investments, according to their risk profile.In terms of life-cycle consumption smoothing, easy and cheap access to credit may induce increased credit demand as means to dissave the mandatory contributions. As such, over-saving effects are expected to pro-cyclically increase credit demand and asset prices. In good times, asset bubbles may arise together with household over-confidence. In bad times, asset prices correct downwards and households may go into deleveraging behavior. In this context, this project intends to study the effect of the Danish pension system design on household life-cycle behavior, in terms of credit demand and its relationship with the existence of asset bubbles. The highly detailed and region-specific Danish household data presents a unique opportunity to understand the link between savings wealth and credit demand in the context of mandatory and collective funded pension contribution rates.


Public (National)


Danmarks Statistik



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