Liquidity versus Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession

Peter Ganong and Pascal Noel

American Economic Review, 2020, vol. 110, issue 10, 3100-3138

Abstract: We exploit variation in mortgage modifications to disentangle the impact of reducing long-term obligations with no change in short-term payments ("wealth"), and reducing short-term payments with no change in long-term obligations ("liquidity"). Using regression discontinuity and difference-in-differences research designs with administrative data measuring default and consumption, we find that principal reductions that increase wealth without affecting liquidity have no effect, while maturity extensions that increase only liquidity have large effects. This suggests that liquidity drives default and consumption decisions for borrowers in our sample and that distressed debt restructurings can be redesigned with substantial gains to borrowers, lenders, and taxpayers.

JEL-codes: E21 G21 G51 R38 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (50)

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DOI: 10.1257/aer.20181243

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