Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession

Adrien Auclert, Paul Goldsmith-Pinkham and Will Dobbie

No 355, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize the level of employment during the Great Recession. We begin by documenting that states with more and less generous bankruptcy exemptions had statistically identical employment outcomes during the 2001-2007 period. Starting in 2008, however, states with more generous bankruptcy exemptions had significantly smaller declines in local non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these responses as the causal effect of the debt relief provided by the consumer bankruptcy system on employment across states, and develop a general equilibrium model to recover the aggregate effect of this debt relief. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form cross-state estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers from more generous to less generous states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (34)

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Working Paper: Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession (2019)
Working Paper: Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:355

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