4 - Credit Regimes and Patterns of Household Indebtedness

Summary

This chapter introduces a novel measure of credit regime permissiveness for seventeen OECD countries spanning the period from 2000 to 2017. It estimates country-specific credit regime permissiveness scores based on six empirical indicators that capture the breadth and scope of financial markets, the allocation of credit between households and businesses, and supporting regulatory and fiscal policy choices using principal component analysis. The Anglo-Saxon economies, the Netherlands, as well as Denmark and Sweden have the most permissive credit regimes, providing households with easy access to credit. By contrast, Southern Europe, Germany, and Austria have the most restrictive credit regimes, making it more difficult for people to take out loans. Credit regimes determine how easily households can borrow money and help shape the distribution of debt across and within countries. The chapter discusses in detail the institutional and policy features of the Danish, American, and German credit regimes. It concludes by documenting considerable variation in households’ coping mechanisms and their likelihood to go into debt to address unexpected income losses. More generally, households only borrow money to compensate for weak unemployment insurance generosity when credit regimes are permissive.