# <u>Data</u>

Croatia’s 2008 household budget survey contains information on household debt service obligations. In particular, there is a distinction between principal and interest payments. Also of interest is the information contained on income and household characteristics, such as socioeconomic status and educational level of household members, the composition of individual households, and information on sources of income for each household member. This detailed household information can be used to assess the income effect of unemployment that might affect one or more members in the household and to calculate household-specific subsistence consumption levels. The information is collected from a total of 3,108 households and, by using the sample weights, more than 1.4 million households in the country are represented in the survey. The HBS 2008 also has a section on household indebtedness. Specifically, households are asked, first, whether or not they have made payments on housing loans and other types of loans over the past 12 months and then, if they have, they are asked to provide the information on loan amounts, payment amounts and the number of installments.<sup>6</sup> The survey includes information on interest payments on mortgages and other loans. At the analytical stage in this paper, all the relevant calculations are adjusted by the corresponding sample weights.

While the use of household budget surveys has numerous advantages, its coverage on loan characteristics is largely absent. For example, there is no information on the currency of existing debts; nor is there any information on the type of interest rates (variable or fixed) in which loans have been extended. To circumvent these limitations, the methodology followed in this paper relies on central bank data on aggregate loan characteristics to define the distribution of household debt between (i) domestic and foreign currency loans and (ii) variable and fixed interest rate loans. The same data source is used to assess changes in interest rates and exchange rates. The weights are determined by aggregate central bank data and the shocks that households are exposed to are incorporated using random sampling techniques; the methodology is described in the next section. Also, the unemployment data reported by the statistical office and the same random sampling techniques are used to assess a household’s vulnerability to income shocks.

# <u>Shocks and Vulnerability</u>

To carry out vulnerability exercises, two factors must be taken into account: the type and size of the economic shocks to which households are exposed and the criteria that should be used to tag a household as vulnerable; the same criteria is used both before and after an economic shock.<sup>7</sup> Regarding economic shocks, four different types of shocks are explored: (i) an increase in the interest paid on loans issued with variable interest rates, (ii) a devaluation of the exchange rate that impacts debt service on foreign currency denominated (or foreign currency indexed) loans,

> 6 In the 2008 HBS, there are very few cases where information on loan amounts is missing. As to income data, only five households do not report current income components, but they nevertheless do not belong to the cluster of households with debt holdings. For a comprehensive description of the 2008 HBS refer to Croatian Bureau of Statistics (2010).

> 7 The shock simulation for HBS data includes, following Beer and Schürz (2007), an arbitrary threshold on total debt service— this paper uses a 35 percent threshold. The shocks are applied as does in existing literature, such as Holló (2007), Żochowski and Zajączkowski (2008), Johansson and Persson (2006), and Vatne (2006).

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