Purpose This study aims to examine the moderating role of subjective well-being (SWB) (happiness) in the relationship between financial development and household debt. It addresses a gap in the literature by investigating both the direct effect of happiness on household indebtedness and its moderating role on the interaction between financial development and household debt. Design/methodology/approach The study employs panel data from 34 emerging and developing countries and applies the system generalized method of moments estimator to account for endogeneity, persistence and country-specific effects. Findings The results indicate that happiness moderates the relationship between financial development and household debt. At lower levels of happiness, SWB amplifies the positive impact of financial development on household debt. However, happiness exhibits a nonlinear relationship with household debt, exerting a negative effect at higher levels. Financial development is found to significantly increase household debt. Originality/value This study contributes to the literature on household indebtedness by incorporating psychological factors into macroeconomic analysis. It provides new evidence on how SWB influences household borrowing behavior and conditions the effect of financial development on household debt in emerging and developing countries.
Chikeya et al. (Tue,) studied this question.