Household Leverage and the Recession of 2007 to 2009
Atif R. Mian
Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER
University of Chicago - Booth School of Business; NBER
October 15, 2009
We show that household leverage is an early and powerful predictor of the 2007 to 2009 recession. Counties in the U.S. that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006 – a full year before any significant change in unemployment. Similarly, counties with the highest reliance on credit card borrowing reduced durable consumption by significantly more following the financial crisis of the fall of 2008. Overall, our estimates show that household leverage growth and dependence on credit card borrowing explain a large fraction of the overall consumer default, house price, unemployment, residential investment, and durable consumption patterns during the recession. Our findings suggest that a focus on household finance may help elucidate the sources macroeconomic fluctuations.
Number of Pages in PDF File: 51
Keywords: household finance, economic fluctuations, recession, household leverage, housing crisis, mortgage defaults, unemployment, auto sales, durable consumption, residential investment
JEL Classification: E0, E2, E3, E5, E6, G01, G21, G3, G32, G33
Date posted: August 28, 2009 ; Last revised: October 19, 2009
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