Consumption in the Great Recession: The Financial Distress Channel

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

No 19-13, Working Paper from Federal Reserve Bank of Richmond

Abstract: During the Great Recession, the collapse of consumption across the US varied greatly but systematically with house-price declines. Our message is that household financial health matters for understanding this relationship. Two facts are essential for our finding: (1) the decline in house prices led to an increase in household financial distress (FD) prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of FD prior to the recession was positively correlated with house-price declines at the onset of the recession. We measure the power of the financial distress channel using a rich-estimated-dynamic model of FD. We find that these channels amplify the aggregate drop in consumption by 7% and 45%, respectively.

Keywords: Consumption; Credit Card; Mortgage; Bankruptcy; Fore- closure; 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: 2019-08-29
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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