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Chicago Fed Letter, No. 123, November 1997
Household Debt

A useful summary measure of the household debt burden is the fraction of personal income taken up by service payments on outstanding debt. It is generally understood that the larger this fraction is, the more sensitive consumer spending will be to an increase in interest rates. The relationship depends on three plausible assumptions. First, in the short run it is difficult for consumers to change their level of outstanding debt. Second, an increase in interest rates tends to increase current debt service payments while either having no impact on income or reducing it. Third, the larger their debt burden, the less likely consumers are to take on additional debt.

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