Exploring household financial strain dynamics

Rising energy and food prices are causing living standards to fall across Europe and straining household budgets. The longer-term outlook for households is unclear as the dynamics of financial strain are not well understood. We address four important research questions on financial strain dynamics by applying a dynamic random coefficients probit model with duration and occurrence dependence to De Nederlandsche Bank (DNB) Household Survey panel data. We find no evidence that households become habituated or sensitised to financial strain over time unlike in studies of responses to stress. Entry into household financial strain is less likely when the household can cope by increasing earnings from work or by borrowing from family and friends but not by the economically inactive entering employment. Our third result is that the persistence of financial strain can be explained by a mutually-enforcing negative cycle through worse health but not through marital conflict or more short-sighted and risk averse decision-making. Finally, we find that neither income or wealth shocks affect financial strain in contrast to other studies. Further research into understanding the experience of financial hardship is warranted in the light of the economic challenges caused by the current cost of living crisis.

Automated summary

Rising energy and food prices are causing a decline in living standards and strain on household budgets in Europe. This study focuses on understanding the dynamics of financial strain and finds that households do not adapt or become sensitive to financial strain over time. It also reveals that the occurrence of financial strain can be reduced by increasing earnings or borrowing from family and friends, but not by economically inactive individuals entering employment. Additionally, the persistence of financial strain is explained by a negative cycle through worse health, rather than marital conflict or decision-making behavior. Income and wealth shocks do not have an impact on financial strain, contrasting with previous studies. Given the economic challenges posed by the current cost of living crisis, further research on understanding financial hardship is warranted.