Exploring household financial strain dynamics

Declan French*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

Rising energy and food prices are causing living standards to fall across Europe and straining household budgets. The longer-term outlook for households is unclear as the dynamics of financial strain are not well understood. We address four important research questions on financial strain dynamics by applying a dynamic random coefficients probit model with duration and occurrence dependence to De Nederlandsche Bank (DNB) Household Survey panel data. We find no evidence that households become habituated or sensitised to financial strain over time unlike in studies of responses to stress. Entry into household financial strain is less likely when the household can cope by increasing earnings from work or by borrowing from family and friends but not by the economically inactive entering employment. Our third result is that the persistence of financial strain can be explained by a mutually-enforcing negative cycle through worse health but not through marital conflict or more short-sighted and risk averse decision-making. Finally, we find that neither income or wealth shocks affect financial strain in contrast to other studies. Further research into understanding the experience of financial hardship is warranted in the light of the economic challenges caused by the current cost of living crisis.

Original languageEnglish
Article number102469
JournalInternational Review of Financial Analysis
Volume86
Early online date10 Jan 2023
DOIs
Publication statusPublished - Mar 2023

Bibliographical note

Publisher Copyright:
© 2022 Elsevier Inc.

Keywords

  • Dynamic binary choice models
  • Entry and persistence
  • Household financial strain
  • Spell duration and occurrence

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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