Does an increase in household debt lead to an increase in inflation? : An empirical study examining the relationship between household debt and inflation

Abstract: Since the 2000s, there has been an upward trend in household debt on a global scale. This paper aims to investigate if the rise in household debt leads to increased inflation via debt-driven consumption. This is to contribute to the lacking research field and gain new perspectives on macroeconomic implications of excessive household debt. The argument stated is built upon the three-equation model, where an increase in household debt could increase aggregate demand and thereby inflation. The study is based on data from 34 OECD countries during the period 2000-2021. In the analysis, both a fixed effect model and a first-difference approach have been estimated with Ordinary Least Squares (OLS). The results from the analysis do not show a significant relationship between household debt and inflation, leading to an inconclusive conclusion.