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Consumption Response to Aggregate Shocks and the Role of Leverage

Agnes Kovacs, May Rostom and Philip Bunn
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Agnes Kovacs: University of Oxford

No 1820, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This paper investigates the relationship between mortgage leverage and consumption around the 2008 financial crisis. Using data from the UK’s Family Expenditure Survey and Wealth and Asset Survey, we first show that high-leveraged households made larger cuts to consumption following the financial crisis, and this was largely driven by young households. Second, using a life-cycle framework, we investigate the channels by which high-leveraged households may have reduced consumption by more than others. Our key finding is that credit supply tightening is the main driver of the empirical co-movement between pre-crisis leverage and consumption growth after 2008.

Keywords: Life-cycle models; Consumption; Household leverage; Debt; Financial crisis (search for similar items in EconPapers)
JEL-codes: D10 D11 D14 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-07
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