Aggregate Implications of Household Financial Distress

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

No 1308, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: The goal of this paper is to provide an empirical and quantitative assessment of the importance of household financial distress for the transmission of shocks from housing wealth to consumption during the Great Recession. We first merge several sources to obtain a new data set of county-level information about households balance sheets and auto purchases. We use this new data set to show two facts: (1) areas with higher household financial distress exhibit a larger marginal propensity to consume out of home value show, and (2) areas with higher household financial distress faced a larger housing net worth shock during the period 2006-2009. Second, we provide suggestive empirical evidence that (1) and (2) were important to understand the dynamics of consumption during the Great Recession. Third, we corroborate our empirical evidence in a life cycle model with mortgage default and defaultable financial (unsecured) debt.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1308

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