Consumption in the Great Recession: The Financial Distress Channel

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

No RWP 19-6, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: During the Great Recession, the collapse of consumption across the U.S. varied greatly but systematically with house-price declines. We find that financial distress among U.S. households amplified the sensitivity of consumption to house-price shocks. We uncover two essential facts: (1) the decline in house prices led to an increase in household financial distress prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of financial distress prior to the recession was positively correlated with house-price declines at the onset of the recession. Using a rich-estimated-dynamic model to measure the financial distress channel, we find that these two facts amplify the aggregate drop in consumption by 7 percent and 45 percent respectively.

Keywords: Consumption; Credit Card; Mortgage; Bankruptcy; Foreclosure; Delinquency; Financial Distress; Great Recession (search for similar items in EconPapers)
JEL-codes: D31 D58 E21 E44 G11 G12 G21 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2019-09-11
New Economics Papers: this item is included in nep-mac
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Working Paper: Consumption in the Great Recession: The Financial Distress Channel (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:rwp19-06

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DOI: 10.18651/RWP2019-06

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