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Household Leverage and the Recession of 2007 to 2009

51 Pages Posted: 28 Aug 2009 Last revised: 19 Oct 2009

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Amir Sufi

University of Chicago - Booth School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2009

Abstract

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.

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

Suggested Citation

Mian, Atif R. and Sufi, Amir, Household Leverage and the Recession of 2007 to 2009 (October 15, 2009). Available at SSRN: https://ssrn.com/abstract=1463596 or http://dx.doi.org/10.2139/ssrn.1463596

Atif Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Sufi (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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