Does household debt hamper real investment in emerging economies?

Purpose This study aims to examine the macroeconomic linkages between household debt and real investment, where investment serves as a major driver of economic growth in developing economies. Design/methodology/approach System Generalized Method of Moments (System GMM) model was used the study data from 37 emerging economies. Findings This study provides empirical evidence from emerging economies regarding the presence of a significant but negative impact of household debt growth on real investment. Moreover, financial literacy and real interest rates emerge as significant determinants of real investment growth. Practical implications This research has important implications for devising appropriate financial regulations and macro-prudential policies in emerging markets, targeting the interaction of household leverage and financial decisions at the aggregate level to sustain long-term economic growth. Originality/value In view of the increasing leverage in the household sector of emerging economies, this study uncovers negative impact of household sector debt on real investment, a channel that was relatively unexplored in existing research and policy frameworks.