How do Borrowers Adjust in a Household Foreign Currency Debt Crisis?

From Győző Gyöngyösi, Judit Rariga and Emil Verner

This paper studies how households adjust to a large revaluation of foreign currency-denominated household debt. Our analysis uses detailed household-level data during Hungary’s large depreciation in 2008. Relative to similar local currency debtors, foreign currency debtors reduce consumption expenditures approximately one-for-one with increased debt service, suggesting binding liquidity constraints. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with nonhomothetic preferences and a “flight from quality.” Debt revaluation has no effect on labor market status, hours, or earnings, but there is a small adjustment toward foreign income streams and a substantial increase in home production.