Low Interest Rates and the Distribution of Household Debt

We study how changes in interest rates affect the distribution of debt within the
population. In a model of borrowing with credit constraints and endogenous house
prices, we show that less constrained and wealthier households increase their borrowing
most when interest rates fall. We then use unique data on the universe of household
credit in Belgium to document that older households with pre-existing housing wealth
borrowed more as interest rates fell. Using regulatory data for identification, we find
that a 1 percentage point fall in the interest rate is associated with a 7% increase in
household debt.