Import Competition and Household Debt

60 Pages Posted: 7 Sep 2017 Last revised: 27 Apr 2018

See all articles by Jean-Noel Barrot

Jean-Noel Barrot

Massachusetts Institute of Technology (MIT)

Erik Loualiche

University of Minnesota, Finance

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York

Julien Sauvagnat

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: April 1, 2018

Abstract

We analyze the effect of import competition on household balance sheets from 2000 to 2007 using individual data on consumer finances. We exploit variation in exposure to foreign competition using industry-level shipping costs and initial differences in regions' industry specialization to study households use of credit markets in response to income shocks. We show that household debt increases significantly in regions where manufacturing industries are more exposed to import competition. A one standard deviation increase in exposure to import competition explains 30% of the cross-regional variation in household leverage growth, and is mostly driven by home equity extraction. Using data on individual expectations, we find that households in affected areas underestimate the persistence of income shock and lever up in order to smooth consumption. Our results highlight the role played by mortgage markets in absorbing displacement shocks triggered by globalization.

Keywords: trade, household finance, mortgages

JEL Classification: D14, F6, G21

Suggested Citation

Barrot, Jean-Noel and Loualiche, Erik and Plosser, Matthew C. and Sauvagnat, Julien, Import Competition and Household Debt (April 1, 2018). FRB of NY Staff Report No. 821. Available at SSRN: https://ssrn.com/abstract=3030014

Jean-Noel Barrot (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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Cambridge, MA 02139-4307
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Erik Loualiche

University of Minnesota, Finance ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States
612 625 5679 (Phone)

HOME PAGE: http://https://loualiche.gitlab.io/www/

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Julien Sauvagnat

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

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