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KDI - Korea Development Institute

KDI - Korea Development Institute



Policy Study Analysis of Sustainability of Household Debt and Policy Implications December 31, 2018


Series No. 2018-11

Policy Study KOR Analysis of Sustainability of Household Debt and Policy Implications #Financial Supervisory and Policy #Consumer Finance
DOI P-ISBN979-11-5932-397-3 E-ISBN979-11-5932-404-8

December 31, 2018

  • KDI
    Kim, Young Il
This study conducted theoretical and empirical analyses to identify the characteristics and causes of households’ financial difficulties in meeting their debt obligations. Based on the theoretical discussion of the life cycle perspective, we examined the factors that make it difficult to sustain debt obligations and conducted empirical analysis using household level micro data based on these discussions. Moreover, this study supplemented the analyses of the causes of defaults and related policy measures by interviewing professional practitioners who routinely deal with default cases, and suggested policy implications by integrating the above analyses.

Sustainability of household debt is significantly influenced by the size of life-time resources, the minimum required expenditure, the amount of debt to be repaid, the exposure to economic shocks, and the tools to absorb shocks, from the theoretical viewpoint of the life cycle hypothesis. Since the factors of default risk are not only related to the financial characteristics of households but also to the various characteristics of households such as demographic, sociological, housing, and residential characteristics, it can be empirically shown that the default risk is closely related to the overall characteristics of households. The results of this analysis suggest that the household over-indebtedness problem can not be solved by financial policy instruments alone, and that a comprehensive approach including economic, social, and welfare measures is necessary. In addition, empirical analysis shows that the characteristics observed in households with high default risk are significantly overlapped with those observed in economically vulnerable groups of households. This analysis suggests that the policy response to the excessive debt problem needs to be closely linked to the poverty or welfare policy area.

The theoretical and empirical analyses and their implications can be confirmed through interviews with professional practitioners who routinely deal with default cases. There were many similar opinions about the measures necessary to deal with the excessive debt problem, but there were some disagreements about some issues. Therefore, it is possible to prepare and implement policy measures relatively quickly for issues that are not disagreeable, but it is be necessary to have an active discussion process to form a social consensus on issues that are highly disagreeable among members of society.
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