The heterogeneous reactions of household debt to income shocks

Nikolaos Koutounidis, Elena Loutskina and Daniel Murphy
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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We study how household debt portfolios—aggregated at the ZIP code level—respond to local income shocks in the United States. We implement two separate identification strategies: (i) a Bartik-style instrument that shifts local earnings via national industry trends, and (ii) a novel instrument utilizing the timing and location of shale oil and gas well discoveries. Across both designs, positive income shocks are, on average, associated with deleveraging. This average, however, masks a sharp bifurcation in financial behavior. Deleveraging in total credit is driven by financially healthier households—those with higher credit scores, higher incomes, or lower leverage—who restrain the growth of credit-card and auto debt. In contrast, financially vulnerable households often treat the windfall as a gateway to new auto credit while still deleveraging credit-card and typically mortgage debt. Looking at mixed-profile households, we find strong mortgage leveraging among households with high income and high debt or low credit scores. These results show that the same income shock can trigger balance-sheet repair for some households and additional leverage for others—varying by both borrower type and debt category—underscoring substantial underlying heterogeneity and highlighting barriers to broad-based financial stability.

Keywords: consumer credit; household debt; heterogeneity; income shocks; local labor demand (search for similar items in EconPapers)
JEL-codes: D14 D15 G51 H31 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2025-12
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:25/1128

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