Labor market upheaval, default regulations, and consumer debt

Kartik Athreya, Juan Sanchez, Xuan Tam () and Eric Young

No 2014-2, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as ?develeraging? (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have ?worked.? We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate.

JEL-codes: D9 E21 K35 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-02-01
New Economics Papers: this item is included in nep-dge, nep-law, nep-mac and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2014/2014-002.pdf Full text (application/pdf)

Related works:
Journal Article: Labor Market Upheaval, Default Regulation, and Consumer Debt (2015)
Working Paper: Labor Market Upheaval, Default Regulations, and Consumer Debt (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2014-002

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2014.002

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().