Benoît Coeuré: The relevance of household-level data for monetary
policy and financial stability analysis
Opening remarks by Mr Benoît Coeuré, Member of the Executive Board of the European
Central Bank, at the ECB Conference on Household Finance and Consumption, Frankfurt
am Main, 17 October 2013.
* * *
Ladies and gentlemen,
Welcome to the European Central Bank Conference on Household Finance and
Consumption. This conference follows an important milestone in a project that the
Eurosystem took up more than six years ago, the Household Finance and Consumption
Survey (HFCS). The results from the first wave of the survey were published last April, and
the microdata were made available to researchers interested in their use. The conference
programme is a testimony to the potential that the HFCS has to enhance our understanding
of the economic behaviour of individual households.
Let me explain why the ECB decided to embark on this complex project. Now more than
ever, after the recent financial crisis, it is clear that aggregate data do not always reveal the
whole story. The same aggregate statistics can be the result of different underlying
situations. In particular, micro-economic sub-structures may react differently when facing a
shock or an economic policy intervention. Progress in economic theory and in empirical
methods also highlights the usefulness of a more granular approach to macroeconomic
outcomes.
To be more precise, there are two areas of great importance for the ECB in which the use of
household-level data can prove very useful: monetary policy and financial stability.
Monetary policy interventions have distributional effects across the population depending on
the composition of the assets and liabilities of households. One could argue that monetary
policy is in essence distributional in the intertemporal dimension and the euro area crisis has
uncovered distributional effects of monetary policy in the spatial dimension. Such effects are
however unintended, or in other words, they are a means to an end, that is price stability.
Central banks should steer away from distributional politics. But there can be a thin line
between intended and unintended consequences, which makes it even more necessary to
understand the cross-sectional effects of monetary policy interventions.
Let me give you a few examples. The proportion of total assets invested in interest-bearing
products and the proportion of liabilities subject to adjustable rates may to a large extent
determine the response of a household's future income and net wealth to a change in
interest rates. We would like to know how homeowners vs. renters, poor vs. rich, employed
vs. unemployed, would feel the impact of specific monetary policy interventions, and to what
extent and how this affects the transmission to the aggregate economy. Moreover, since we
operate in a monetary union, it is also important to measure and analyse the effects across
the different Member States, which is only possible if homogeneous information is available
for all of them. In addition, the survey can be used to estimate how inflation affects portfolios
of various households, along the lines of Doepke and Schneider (2006).1
We are also interested in the implications of household financial positions for financial
stability. For this purpose, the matching of assets and liabilities has to be done at the
individual level. When monitoring the evolution of financial vulnerability ratios such as the
debt service to income ratio, the debt to income ratio or the debt to asset ratio, aggregate
figures may mask underlying problematic situations, such as pockets of households with
unsustainable financial burdens which could lead to defaults and bank losses in case of an
adverse macroeconomic scenario. In this vein, the data can be used for conducting
microsimulations as a policy tool. This is already done in other central banks such as those of
Finland2 or Sweden3, which incorporate these simulations as part of their regular monitoring
of the economy. As another example, the reasons for the accumulation of debt can be
studied as in Mian and Sufi (2009)4, who document that the expansion of mortgage credit in
the US before the crisis occurred disproportionately in areas with declining relative income
growth and led to a sharp increase in mortgage defaults later on.
Going beyond these two direct policy applications, the HFCS offers researchers an
invaluable tool to deepen our understanding of a wide variety of topics in the field of
household finance.
The first results of these efforts will already be presented in this conference. I would like to
draw your attention to some of them. Household indebtedness has grown steadily in most
developed countries in the last two decades, both in absolute terms and relative to
household income5, but the research on the causes and consequences of this indebtedness
is limited to a few countries, mainly the US and the UK. We are now in a position to study
which factors determine the debt holdings of euro area households, how is this debt
distributed among them, what type of debt do households make use of and what is the effect
of these holdings on spending.
It is also important to study the portfolio of assets that households are holding. There is
ample evidence that most households hold rather simple portfolios, composed basically of
real estate and deposits.6 However, the development of financial markets and the creation of
new financial instruments have facilitated the diversification of households' portfolios. Stock
holdings have increased, mainly through the commercialisation of mutual funds and
retirement accounts, and this has allowed more households to benefit from the equity
premium. On the other hand, and in light of the problematic financial situation faced by many
households during the recent financial crisis, more research will be needed to see whether
financial innovation could have negative effects on some households and to what extent
households are able to understand the risks they are exposed to, e.g. once house prices
start to decline substantially. This goes hand in hand with the concept of financial literacy,
another area of research which has attracted substantial attention lately, and which may
become even more relevant an issue given the increasing trend towards private households
managing their own pension wealth in the future.7 As an example, one of the papers that will
be presented in the conference studies the effects of exposure to financial training on the
debt behaviour of young US consumers.
2
Herrala R. and K. Kauko (2007), "Household loan loss risk in Finland - estimations and simulations with micro
data", Bank of Finland research discussion papers 5/2007.
3
Persson M. (2009), "Household indebtedness in Sweden and implications for financial stability - the use of
household level data", BIS Papers No 46.
4
Mian, Atif and Amir Sufi (2009), "The Consequences of Mortgage Credit Expansion: Evidence from the U.S.
Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496,
November.
5
Girouard, N., M. Kennedy and C. André (2006), "Has the Rise in Debt Made Households More Vulnerable?",
OECD Economics Department Working Papers, No. 535, OECD Publishing.
6
Guiso, L., M. Haliassos and T. Jappelli (2002), Household Portfolios, Cambridge: MIT Press.
7
Lusardi, A. (2010), "The importance of financial literacy", Presentation to the Conference on Household
Finance and Consumption, Luxembourg City, 25-26 October 2010.
Another advantage of survey data is the possibility of collecting information on households'
attitudes, beliefs and expectations. This allows researchers to establish a connection
between behavioural traits and observed financial decisions. For example, in the HFCS,
households are asked about the amount of risk they are willing to take on when making
financial investments or whether over the next year they expect their income to go up more,
less or about the same as prices. In the next couple of days we will listen to presentations on
how gamblers manage their personal finances or how important are the presence of loss
aversion and narrow framing, two of the most prominent aspects of prospect theory, for
portfolio choice decisions.
The study of household finance has much to say on the causes and consequences for the
economy of the current financial crisis. The 2007 crisis, which originated in the US, is
labelled the "sub-prime crisis", and it is rooted in the excessive accumulation of debt by
households which did not have the appropriate buffers to repay their debt in case of a
negative shock. As policy-makers we should be deeply interested in knowing where the risks
are concentrated in the household sector, how much of a threat they pose to other agents in
the economy, which kind of shocks households are more vulnerable to. And should we, as
policy-makers, worry about a house price decline, a rise in unemployment or a stock market
bust? How exposed is consumer demand to declines in prices of different assets? How will
financial losses of individual households impact on public finances? Tomorrow morning we
will hear about some of these topics and in particular about the effect of macroeconomic
experiences on households' risk-taking behaviour and portfolio choice, the effect of credit
supply shocks on asset allocation and the consumers' demand for cash in an after-crisis
scenario of low interest rates.
The closing session of the conference will deal with the topic of cross-country wealth
comparisons. Explaining household wealth differences across countries is not as easy as
casual observers might think. There is a plethora of factors involved in the wealth
accumulation process. Public comments on the first wave of the survey last April confirmed
the usefulness of a careful analysis and explanation of cross-country wealth differences, as
was done in the explanatory documents.8 The papers which will be presented here will
analyse the role of income, home ownership and house price dynamics, household structure
and intergenerational transfers in this process of wealth accumulation.
I hope the exchange of ideas that will take place in the next two days will help us to further
our understanding of how households manage their finances in a complex and uncertain
world, to draw useful policy lessons and prepare for the next waves of the survey. And I hope
this conference will spur research in this exciting field, from which we all, researchers and
policy-makers alike, have so much to learn.
Thank you very much for your attention.