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Household Leverage and the Recession

Virgiliu Midrigan and Thomas Philippon ()

No 11407, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A salient feature of the Great Recession is that regions that experienced larger declines in household debt also experienced larger declines in employment. We study a model in which liquidity constraints amplify the response of employment to changes in debt. We estimate the model using panel data on consumption, employment, wages and debt for U.S. states. Though successful in matching the cross-sectional evidence, the model predicts that deleveraging cannot, by itself, account for the large drop in aggregate employment in the U.S. The 25% decline in household debt observed in the data leads to a modest 1.5% drop in the natural rate of interest, and is easily offset by monetary policy. Household deleveraging is more potent, however, in the presence of other shocks that trigger the zero lower bound on interest rates. In the presence of such shocks household deleveraging accounts for about half of the decline in U.S. employment.

Keywords: great recession; Household Debt; Regional Evidence; zero lower bound (search for similar items in EconPapers)
JEL-codes: E2 E4 E5 G0 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2016-07
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Related works:
Working Paper: Household Leverage and the Recession (2013)
Working Paper: Household Leverage and the Recession (2011) Downloads
Working Paper: Household Leverage and the Recession (2011) Downloads
Working Paper: Household Leverage and the Recession (2011) Downloads
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