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Household Balance Sheets, Consumption, and the Economic Slump

50 Pages Posted: 18 Nov 2011 Last revised: 7 Jun 2013

Atif R. Mian

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

Kamalesh Rao

MasterCard Advisors

Amir Sufi

University of Chicago - Booth School of Business; NBER

Date Written: June 7, 2013

Abstract

We investigate the consumption consequences of the 2006 to 2009 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5 to 7 cents with substantial heterogeneity across zip codes. Zip codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, zip codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. 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.

Keywords: Great Recession, Aggregate Demand, Consumption, Household Leverage, Household Debt, Marginal Propensity to Consume, Deleveraging

JEL Classification: E20, E30, E40, E51

Suggested Citation

Mian, Atif R. and Rao, Kamalesh and Sufi, Amir, Household Balance Sheets, Consumption, and the Economic Slump (June 7, 2013). Chicago Booth Research Paper No. 13-42; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=1961211 or http://dx.doi.org/10.2139/ssrn.1961211

Atif R. Mian (Contact Author)

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

Kamalesh Rao

MasterCard Advisors ( email )

2000 Purchase Street
Purchase, NY 10577
United States

Amir Sufi

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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