Why do households repay their debt in UK during the COVID-19 crisis?

What is it about?

This paper employs a vector autoregressive (VAR) model that nests neural networks and uses Mixed Data Sampling (MIDAS) techniques. We investigate whether COVID-19 impacts household finances, like household debt repayments in the UK. Our results show that household debt repayments’ response to the first principal component of COVID-19 shocks is negative, albeit of low magnitude. However, when we employ specific COVID-19 related data like vaccines and tests the responses are positive, insinuating the underlying dynamic complexities. Overall, confirmed cases and confirmed deaths negatively affect household debt repayments. We also report low persistence in household debt repayments. Generalized impulse response functions confirm the main results. As draconian measures, the lockdowns are eased it appears that the COVID-19 shocks are diminishing, and household financial data converge to the levels prior to the pandemic albeit with some lags.

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