Consumption response to aggregate shocks and the role of leverage

Agnes Kovacs, May Rostom and Philip Bunn

Manchester School, 2025, vol. 93, issue 1, 30-69

Abstract: This paper investigates the relationship between mortgage leverage and consumption around the 2008 financial crisis. Using data from the UK's Family Expenditure Survey and Wealth and Asset Survey, we first show that high‐leveraged households made larger cuts to consumption following the financial crisis, and this was largely driven by young households. Second, using a life‐cycle framework, we qualitatively evaluate four possible channels that could explain the observed positive relationship between consumption and leverage: income, uncertainty, credit supply and house price channels. Our key finding is that credit supply tightening is the main driver of the empirical co‐movement between pre‐crisis leverage and consumption growth after 2008.

Date: 2025
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