The Response of Household Debt to Consumer Confidence Shocks in Germany, Italy and France

The purpose of this paper is to study whether and how consumer confidence affects household debt dynamics in three largest economies in the euro area, Germany, Italy and France, by employing vector autoregressive model and impulse response analysis on the data for the period 1999Q1–2024Q1. The results suggest substantial heterogeneity of household debt responses to consumer confidence shocks. Specifically, improved consumer confidence leads to a fall in household debt in Germany, initially after the shock. In contrast, household debt in Italy increases with a delay of three quarters after a positive shock to consumer confidence. In France, unlike in Germany and Italy, the response of household debt to an unexpected increase in consumer confidence is not significant. Additionally, the impulse responses of macroeconomic fundamentals to the shocks in consumer confidence were analyzed and compared across the sampled countries. Finally, the robustness of the results was tested using an alternative measure of household debt.