Home / Regular Issue / JSSH Vol. 30 (3) Sep. 2022 / JSSH-8426-2021


Household Debt and Economic Growth: The Role of Institutional Quality

Khairunnisa Abd Samad, Siti Nurazira Mohd Daud and Sylva Alif Rusmita

Pertanika Journal of Social Science and Humanities, Volume 30, Issue 3, September 2022

DOI: https://doi.org/10.47836/pjssh.30.3.03

Keywords: Keywords: Bias-corrected LSDV, economic growth, household debt, institutional quality

Published on: 6 September 2022

Household debt has a detrimental effect on economic growth. Thus, this study examines the connection between household debt and growth in institutional quality. The impact of ,the relationship on economic growth is assessed using a bias-corrected least square dummy variable of 43 nations. We discovered that institutional quality enhances the role of household debt in sustaining economic growth. Household debt is significantly detrimental to growth when institutional quality is low. Its harmful effect can be lessened with medium institutional quality. Interestingly, higher household debt is beneficial in sustaining growth if accompanied by better institutional quality. Household debt and institutions reinforce each other towards sustaining economic stability for countries with higher institutional quality. The findings are expected to assist central banks and other government authorities in formulating the relevant institutional settings for ensuring economic sustainability, such as prudent debt management and macro-prudential policy. Future studies may consider empirical analysis on a distinct split sample of advanced and emerging economies and employ different estimator methods.

  • Acemoglu, D., Gallego, F. A., & Robinson, J. A. (2014). Institutions, human capital, and development. Annual Review of Economics., 6(1), 875-912. https://doi.org/10.1080/1540-496X.2019.1588725

  • Acemoglu, D., Johnson, S., & Robinson, J. A. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369-1401.

  • Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S., & Evanoff, D. D. (2014). Predatory lending and the subprime crisis. Journal of Financial Economics, 113(1), 29-52. https://doi.org/10.1016/j.jfineco.2014.02.008

  • Aliber, R. Z., & Kindleberger, C. P. (2017). Manias, panics, and crashes: A history of financial crises. Springer.

  • Alter, A., Feng, A. X., & Valckx, N. (2018). Understanding the macro-financial effects of household debt: A global perspective. International Monetary Fund.

  • Anderson, T. W., & Hsiao, C. (1982). Formulation and estimation of dynamic models using panel data. Journal of Econometrics, 18(1), 47-82. https://doi.org/10.1016/0304-4076(82)90095-1

  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297. https://doi.org/10.2307/2297968

  • Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51. https://doi.org/10.1016/0304-4076(94)01642-D

  • Bahadir, B., & Valev, N. (2020). Institutions, household credit composition, and the business cycle. Economic Inquiry, 58(3), 1401-1413. https://doi.org/10.1111/ecin.12885

  • Barro, R. J. (2003). Determinants of economic growth in a panel of countries. Annals of Economics and Finance, 4, 231-274.

  • Barro, R. J., & Lee, J. W. (2013). A new data set of educational attainment in the world, 1950–2010. Journal of Development Economics, 104(C), 184-198. https://doi.org/10.1016/j.jdeveco.2012.10.001

  • Barro, R. J., & Sala-i-Martin, X. (1997). Technological diffusion, convergence, and growth. Journal of Economic growth, 2(1), 1-26. https://doi.org/10.1023/A:1009746629269

  • Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8

  • Brambor, T., Clark, W. R., & Golder, M. (2006). Understanding interaction models: Improving empirical analyses. Political Analysis, 14(1), 63-82. https://www.jstor.org/stable/25791835

  • Bruno, G. S. (2005a). Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models. Economics Letters, 87(3), 361-366. https://doi.org/10.1016/j.econlet.2005.01.005

  • Bruno, G. S. (2005b). Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals. The Stata Journal, 5(4), 473-500. https://doi.org/10.1177/1536867X0500500401

  • Bun, M. J., & Kiviet, J. F. (2001). The accuracy of inference in small samples of dynamic panel data models (Discussion paper No. 01-006/4). Tinbergen Institute.

  • Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The real effects of debt. Review of Financial Studies, 22, 1-34.

  • Cervellati, M., & Sunde, U. (2011). Life expectancy and economic growth: The role of the demographic transition. Journal of Economic Growth, 16(2), 99-133. https://doi.org/10.1007/s10887-011-9065-2

  • Chaudron, R. F. (2018). Bank’s interest rate risk and profitability in a prolonged environment of low interest rates. Journal of Banking & Finance, 89, 94-104. https://doi.org/10.1016/j.jbankfin.2018.01.007

  • Checherita, W. C., & Rother, P. (2012). The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area. European Economic Review, 56(7), 1392-1405. https://doi.org/10.1016/j.euroecorev.2012.06.007

  • Dahir, A. M., Mahat, F., Razak, N. H. A., & Bany-Ariffin, A. N. (2019). Capital, funding liquidity, and bank lending in emerging economies: An application of the LSDVC approach. Borsa Istanbul Review, 19(2), 139-148. https://doi.org/10.1016/j.bir.2018.08.002

  • Dao, M. Q. (2012). Population and economic growth in developing countries. International Journal of Academic Research in Business and Social Sciences, 2(1), 6-17.

  • Daud, S. N. M., Podivinsky, J. M., & Abd Samad, K. (2021). Household debt and country economic growth: Does a magic threshold exist? International Journal of Business and Society, 22(1), 161-174. https://doi.org/10.33736/ijbs.3168.2021

  • Demirguc-Kunt, A., & Detragiache, E. (1998). The determinants of banking crises in developing and developed countries. IMF Staff Papers, 45(1), 81-109.

  • Demetriades, P., & Hook Law, S. (2006). Finance, institutions and economic development. International Journal of Finance & Economics, 11(3), 245-260. https://doi.org/10.1002/ijfe.296

  • Dobbie, W., & Song, J. (2015). Debt relief and debtor outcomes: Measuring the effects of consumer bankruptcy protection. American Economic Review, 105(3), 1272-1311. https://doi.org/10.1257/aer.20130612

  • Gazdar, K., & Cherif, M. (2015). Institutions and the finance–growth nexus: Empirical evidence from MENA countries. Borsa Istanbul Review, 15(3), 137-160. https://doi.org/10.1016/j.bir.2015.06.001

  • Gokal, V., & Hanif, S. (2004). Relationship between inflation and economic growth. Economics Department, Reserve Bank of Fiji.

  • Gómez-Puig, M., & Sosvilla Rivero, S. (2017). Nonfinancial debt and economic growth in euro-area countries (Working Papers, IR17/14). IREA.

  • Grossman, G. M., & Helpman, E. (1993). Innovation and growth in the global economy. MIT Press.

  • Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others? The Quarterly Journal of Economics, 114(1), 83-116. http://www.jstor.org/stable/2586948

  • Horioka, C. Y., & Niimi, Y. (2020). Was the expansion of housing credit in Japan good or bad? Japan and the World Economy, 53, 100996. https://doi.org/10.1016/j.japwor.2020.100996

  • Huang, H., & Wei, S. J. (2006). Monetary policies for developing countries: The role of institutional quality. Journal of International Economics, 70(1), 239-252. https://doi.org/10.1016/j.jinteco.2005.09.001

  • Ibrahim, M. H., & Law, S. H. (2016). Institutional quality and CO2 emission – Trade relations: Evidence from Sub‐Saharan Africa. South African Journal of Economics, 84(2), 323-340. https://doi.org/10.1111/saje.12095

  • Ibrahim, M. H., Salim, K., Abojeib, M., & Yeap, L. W. (2019). Structural changes, competition and bank stability in Malaysia’s dual banking system. Economic Systems, 43(1), 111-129. https://doi.org/10.1016/j.ecosys.2018.09.001

  • International Monetary Fund. (2012). Dealing with household debt. https://www.imf.org/~/media/Websites/IMF/imported-flagship-issues/external/pubs/ft/weo/2012/01/pdf/_c3pdf.ashx

  • International Monetary Fund. (2017). Household debt and financial stability. https://www.imf.org/~/media/Files/Publications/GFSR/2017/October/chapter-2/Documents/C2.ashx

  • Jappelli, T., Pagano, M., & Di Maggio, M. (2013). Households’ indebtedness and financial fragility. Journal of Financial Management, Markets and Institutions, 1(1), 23-46.

  • Justiniano, A., Primiceri, G. E., & Tambalotti, A. (2016). A simple model of subprime borrowers and credit growth. American Economic Review, 106(5), 543-47. http://doi.org/10.3386/w21942

  • Keynes, J. M. (1936). The general theory of employment, interest and money. Palgrave Macmillan.

  • Khan, M. (1995). State failure in weak states: A critique of new institutionalist explanations. In The new institutional economics and Third World development (pp. 85-100). Routledge.

  • Khan, M. A., Kong, D., Xiang, J., & Zhang, J. (2020). Impact of institutional quality on financial development: Cross-country evidence based on emerging and growth-leading economies. Emerging Markets Finance and Trade, 56(15), 3829-3845. https://doi.org/10.1080/1540496X.2019.1588725

  • Kim, H. J., Lee, D., Son, J. C., & Son, M. K. (2014). Household indebtedness in Korea: Its causes and sustainability. Japan and the World Economy, 29, 59-76. https://doi.org/10.1016/j.japwor.2013.12.001

  • Kim, Y. E., & Loayza, N. V. (2017). The drive toward universal health coverage: Progress and challenges around the world (Working Paper No. 2017-96).

  • Klapper, L. F., & Love, I. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance, 10(5), 703-728. https://doi.org/10.1016/S0929-1199(03)00046-4

  • Laeven, L., & Valencia, F. (2013). Systemic banking crises database. IMF Economic Review, 61(2), 225-270.

  • Law, S. H., & Habibullah, M. S. (2009). The determinants of financial development: Institutions, openness and financial liberalisation. South African Journal of Economics, 77(1), 45-58. https://doi.org/10.1111/j.1813-6982.2009.01201.x

  • Law, S. H., Kutan, A. M., & Naseem, N. A. M. (2018). The role of institutions in finance curse: Evidence from international data. Journal of Comparative Economics, 46(1), 174-191. https://doi.org/10.1016/j.jce.2017.04.001

  • Levine, R. (1998). The legal environment, banks, and long-run economic growth. Journal of Money, Credit and Banking, 30(3), 596-613. https://doi.org/10.2307/2601259

  • Lombardi, M. J., Mohanty, M. S., & Shim, I. (2017). The real effects of household debt in the short and long run. BIS Quarterly Report. http://www.bis.org/publ/work607.pdf

  • Mian, A., Sufi, A., & Verner, E. (2017). Household debt and business cycles worldwide. The Quarterly Journal of Economics, 132(4), 1755-1817. https://doi.org/10.1093/qje/qjx017

  • North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.

  • Perić, B. Š. (2019). Do the most frequently used dynamic panel data estimators have the best performance in a small sample? A Monte Carlo comparison. Croatian Operational Research Review, 10(1), 45-54. https://doi.org/10.17535/crorr.2019.0005

  • Radelet, S., Sachs, J., & Lee, J. (2001). The determinants and prospects of economic growth in Asia. International Economic Journal, 15, 1-29. https://doi.org/10.1080/10168730100000041

  • Roodman, D. (2009). A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135-158. https://doi.org/10.1111/j.1468-0084.2008.00542.x

  • Sachs, J. D., & Warner, A. W. (1997). Fundamental sources of long-run growth. American Economic Review, 87(2), 184-188. https://www.jstor.org/stable/2950910

  • Samad, K. A., Daud, S. N. M., & Dali, N. R. S. M. (2020). Determinants of household debt in emerging economies: A macro panel analysis. Cogent Business & Management, 7(1), 1831765. https://doi.org/10.1080/23311975.2020.1831765

  • Seghezza, E., & Baldwin, R. E. (2008). Testing for trade-induced investment-led growth. Economia Internazionale/International Economics, 61(2-3), 507-537.

  • Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94. https://doi.org/10.2307/1884513

  • Swan, T. W. (1956). Economic growth and capital accumulation. Economic Record, 32(2), 334-361. https://doi.org/10.1111/j.1475-4932.1956.tb00434.x

  • Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1), 25-51. https://doi.org/10.1016/j.jeconom.2004.02.005

  • Woo, J., & Kumar, M. S. (2015). Public debt and growth. Economica, 82(328), 705-739. https://doi.org/10.1111/ecca.12138

ISSN 0128-7702

e-ISSN 2231-8534

Article ID


Download Full Article PDF

Share this article

Recent Articles