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In macro oriented research papers the role of private debt is discussed and that apparently when there is a lot of private debt in the economy, households tend to be borrowed constrained..

Could someone explain why we link private debt to borrowed constrained households? I understand that when households are borrowed constrain they have a larger marginal propensity to consume out of additional income. But, why is private debt linked in the background as a variable that influences this borrowing constrain, i.e. when consumers are borrowed constrain, the economy is in a state of high private debt. I mean, you could also say that when a lot of private debt is in the economy, households are actually getting debt easier so they are not borrowed constrained, right?

Suggesting a model, theory and/or a paper that explains this would be appreciated...

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  • $\begingroup$ If by "borrowed constrained" you mean HH cannot further borrow, it makes sense b/c compared to low debt situation, high debt should come with more HH's being constrained by their borrowing limit. $\endgroup$ – Art Aug 20 at 4:55

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