The relationship between leverage and household spending behavior: evidence from the 2007-2009 survey of consumer finances

Karen E. Dynan and Wendy Edelberg

Review, 2013, issue Sep, 425-448

Abstract: Some recent studies suggest that high levels of household debt and leverage have contributed to the relatively sluggish growth of consumer spending in the past few years (Dynan, 2012; Mian, Rao, and Sufi, 2013). However, this conclusion has not been widely accepted because of the empirical challenges associated with identifying the relationship amid the dramatic and complicated changes in the household economic environment during the Great Recession and subsequent slow recovery. Leverage may indirectly influence spending by increasing borrowing constraints, impeding refinancing, and raising the likelihood that a household will face future borrowing constraints. Leverage may directly influence spending simply by making some households uncomfortable with their leverage compared with some behavioral benchmark. The authors use the 2007-09 Survey of Consumer Finances panel to explore these issues. They find that highly leveraged households were more likely to report cutting back their spending in 2009, even after controlling for other factors expected to influence spending, such as changes in income and wealth. In analyzing that relationship, the authors find evidence that leverage influenced household spending through several channels.

Keywords: Consumer behavior; Households - Finance (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (19)

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