Econometrica Vol. 90 No. 5 2022

Household Leverage and the Recession

Callum Jones¹; Virgiliu Midrigan^2,3; Thomas Philippon^4,3,5

¹ Federal Reserve Board · ² Department of Economics, New York University · ³ National Bureau of Economic Research · ⁴ Department of Finance, New York University Stern School of Business · ⁵ Centre for Economic Policy Research

Abstract

We evaluate and partially challenge the household leverage view of the Great Recession. In the data, employment and consumption declined more in U.S. states where household debt declined more. We study a model of a monetary union composed of many regions in which liquidity constraints shape the response of employment and consumption to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit explain 40% of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2007–2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

DOI

10.3982/ecta16455

Volume

90

Issue

5

Pages

2471-2505

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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