Household Leverage and the Recession

52 Pages Posted: 1 Oct 2018

See all articles by Callum Jones

Callum Jones

Board of Governors of the Federal Reserve System

Virgiliu Midrigin

New York University (NYU) - Department of Economics

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

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Date Written: August 2018

Abstract

We evaluate and partially challenge the 'household leverage' view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Keywords: Household credit, Household consumption, Economic recession, Employment, Financial crises, Econometric models, Great Recession, Household Debt, Regional Evidence, Zero Lower Bound, General

JEL Classification: E20, E40, E50, G00, G01

Suggested Citation

Jones, Callum and Midrigin, Virgiliu and Philippon, Thomas, Household Leverage and the Recession (August 2018). IMF Working Paper No. 18/194, Available at SSRN: https://ssrn.com/abstract=3257360

Callum Jones (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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Virgiliu Midrigin

New York University (NYU) - Department of Economics ( email )

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New York, NY 10011
United States

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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