Credit to private sector, household debt and economic growth: An empirical investigation of EU countries

Abstract

This paper investigates how the credit to private sector affects the impact of household debt on economic growth in 25 European Union countries over the period 1995-2018. The findings reveal that the positive effect of household debt on economic growth turns to negative with the onset of the 2008 global financial crisis (GFC) and beyond a certain point at around 58% of GDP, thus suggesting that their relationship is non-linear. Interestingly, the adverse effect subjects to the increased pressure of the credit to private sector when it is above 70%, and the pressure becomes even higher when the ratio is above 90%.