On the Importance of Easing Consumer Credit Frictions

Patrick Kehoe, Virgiliu Midrigan and Elena Pastorino

No 17-5, Economic Policy Paper from Federal Reserve Bank of Minneapolis

Abstract: The vast bulk of the government financial interventions during the Great Recession was directed at helping banks weather the financial crisis. The design of these programs was heavily influenced by the view that helping banks preserve their means of providing finance to firms was the most important ingredient in ensuring a quick recovery from the crisis. We argue that the cross-state patterns of employment, output and debt in the United States suggest that financial frictions that led to a tightening of credit to consumers were more important in accounting for the recession than those that led to a tightening of credit to firms. Our analysis implies that policies designed to ease consumer credit conditions would have been more effective at ensuring a rapid recovery than the policies actually adopted that focused on easing firm credit conditions.

Pages: 5 pages
Date: 2017-12-21
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Citations: View citations in EconPapers (2)

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