Household Financial Distress and the Burden of ‘Aggregate’ Shocks

Kartik Athreya, Ryan Mather, Jose Mustre-del-Rio and Juan Sanchez

No RWP 20-13, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: In this paper we show that household-level financial distress (FD) varies greatly and can increase vulnerability to economic shocks. To do this, we establish three facts: (i) regions in the United States vary significantly in their “FD-intensity,” measured either by how much additional credit households can access or how delinquent they are on debts, (ii) shocks that are typically viewed as “aggregate” in nature hit geographic areas quite differently, and (iii) FD is an economic “pre-existing condition”: the share of an aggregate shock borne by a region is positively correlated with the level of FD present at the time of the shock. Using an empirically disciplined and institutionally rich model of consumer debt and default, we show that in the shocks dealt by the Great Recession and the initial months of the COVID-19 pandemic, FD had quantitative significance for consumption. Our model suggests that the uneven distribution of FD creates widely varying consumption responses to shocks. This is true even when subjecting regions with differing levels of FD to the same shocks.

Keywords: Consumption; Credit card debt; Bankruptcy; Recession; Foreclosure; Mortgages; Delinquency; Financial distress; Geography (search for similar items in EconPapers)
JEL-codes: D31 D58 E21 E44 G11 G12 G21 (search for similar items in EconPapers)
Pages: 74
Date: 2020-10-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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https://www.kansascityfed.org/documents/5641/rwp20 ... nAggregateShocks.pdf (application/pdf)

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Working Paper: Household Financial Distress and the Burden of 'Aggregate' Shocks (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:88852

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DOI: 10.18651/RWP2020-13

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