The Effects of Macroeconomic Shocks: Household Financial Distress Matters

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

No 2019-025, Working Papers from Federal Reserve Bank of St. Louis

Abstract: When a macroeconomic shock arrives, variation in household balance-sheet health (captured by the presence of financial distress “FD”), leads to differential access to credit, and hence a distribution of consumption responses. As we document, though, over the past two recessions, households in prior FD also experienced macroeconomic shocks more intensely than others, leading to a distribution of shock severity. Quantifying the importance of each dimension of heterogeneity (FD or shock severity) for consumption requires a structural model. We find that heterogeneity in FD matters more than dispersion in shock severity for shaping the responses of individual and aggregate consumption to any shock.

Keywords: consumption; credit card debt; recession; bankruptcy; foreclosure; mortgage; delinquency; financial distress; inequality; poverty (search for similar items in EconPapers)
JEL-codes: D31 D58 E21 E44 G11 G12 G21 (search for similar items in EconPapers)
Pages: 76 pages
Date: 2019-09-17, Revised 2023-09-11
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
Note: Publisher DOI: https://doi.org/10.1093/rfs/hhae058
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Published in The Review of Financial Studies

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DOI: 10.20955/wp.2019.025

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