Household Balance Sheets, Consumption, and the Economic Slump
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
February 27, 2013
Chicago Booth Research Paper No. 13-42
Fama-Miller Working Paper
We show that the 2006 to 2009 housing collapse in the United States resulted in a very unequal distribution of wealth shocks due to geographic variation in ex-ante leverage and house price declines. We investigate the consumption consequences of these wealth shocks and show that the consumption risk-sharing hypothesis is easily rejected. We estimate an elasticity of consumption with respect to housing net worth of 0.6 to 0.8 and an average marginal propensity to consume (MPC) of 5 to 7 cents for every dollar loss in housing wealth. Further, estimated MPCs are significantly higher for poorer and more levered households. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009.
Number of Pages in PDF File: 60
Keywords: Great Recession, Aggregate Demand, Consumption, Household Leverage, Household Debt, Marginal Propensity to Consume
JEL Classification: E20, E30, E40, E51working papers series
Date posted: November 18, 2011 ; Last revised: April 19, 2013
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