Household Leverage and the Recession

Callum Jones, Virgiliu Midrigan and Thomas Philippon

No 2018/194, IMF Working Papers from International Monetary Fund

Abstract: We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Keywords: WP; interest rate; household debt; Great Recession; Regional Evidence; Zero Lower Bound; credit shock; equilibrium interest rate; implied rate; fed funds rate; nominal interest rate; home equity; marginal utility; min consumption ratio; household credit limit; consumption ratio; precautionary savings motive; market value; Employment; Credit; Consumption; Consumer credit (search for similar items in EconPapers)
Pages: 51
Date: 2018-08-30
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Citations: View citations in EconPapers (30)

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Related works:
Journal Article: Household Leverage and the Recession (2022)
Working Paper: Household Leverage and the Recession (2018)
Working Paper: Household Leverage and the Recession (2011)
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