The Effects of Macroeconomic Shocks: Household Financial Distress Matters

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

No RWP 20-13, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper investigates how, and how much, household financial distress (FD), arising from allowing debts to go unpaid, matters for the aggregate and cross-sectional consumption responses to macroeconomic risk. Through a battery of structural models, we show that FD can affect consumption responses through three channels: (1) as another margin of adjustment to shocks (direct channel); (2) because its persistence implies a significant degree of preference heterogeneity (indirect channel); and (3) because it can exacerbate macroeconomic risks whenever it is more severe in the hardest-hit regions, as evinced by the last two recessions (correlation channel). We find that all channels shape cross-sectional differences in the response of consumption to shocks. However, only the direct and indirect channels matter in the aggregate.

Keywords: Consumption; Credit card debt; Bankruptcy; Recession; Foreclosure; Mortgages; Delinquency; Financial distress; Geography (search for similar items in EconPapers)
JEL-codes: D31 D58 E21 E44 G11 G12 G21 (search for similar items in EconPapers)
Pages: 81
Date: 2020-10-05, Revised 2024-01-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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https://www.kansascityfed.org/research/research-wo ... macroeconomic-risks/ Full text (text/html)

Related works:
Journal Article: The Effects of Macroeconomic Shocks: Household Financial Distress Matters (2025)
Working Paper: The Effects of Macroeconomic Shocks: Household Financial Distress Matters (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:88852

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DOI: 10.18651/RWP2020-13

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