Household Credit and Employment in the Great Recession

Abstract

How much did shocks to household credit supply reduce employment in the Great Recession? To answer this question, I provide a general foundation for shift-share credit supply shocks, which shows that they are useful for accounting, but direct estimates may be biased. Combining the shift-share shocks with a natural experiment, I find that a one standard deviation decline in credit supply to households reduced home purchase and mortgage refinance credit by 7 and 20 percent, and employment by 3 percent. In partial equilibrium, the household credit channel implies employment losses equal to at least 20 percent of the aggregate decline.

Keywords: Household credit, mortgages, employment, Great Recession, shift-share shock

JEL Classification: E21, E24, E32, G01, G21