Debt repayment problems: short-term and long-term implications for spending.

The paper investigates the economic consequences of financial difficulties. A unique quarterly panel dataset from 2004–2011 from Estonia, a euro area country, makes it possible to estimate the quarterly spending response to debt repayment problems on top of the effect of income and indebtedness. The results imply that problems lead to a substantial short-term drop in spending. Although spending recovers after the debt repayment problems are resolved, the increase is smaller than the original decline and spending remains at a lower level than before the problems emerged. An important finding is that the longer the problems last, the more severe the decline in spending is. The results suggest that the experience of debt repayment problems has severe long-term economic implications, a cost that should be taken into account when the consequences of indebtedness are assessed.