Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession

91 Pages Posted: 26 Mar 2019

See all articles by Adrien Auclert

Adrien Auclert

Stanford University - Department of Economics

Will Dobbie

Princeton University

Paul S. Goldsmith-Pinkham

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.

Suggested Citation

Auclert, Adrien and Dobbie, Will and Goldsmith-Pinkham, Paul S., Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession (March 2019). NBER Working Paper No. w25685, Available at SSRN: https://ssrn.com/abstract=3359485

Adrien Auclert (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Will Dobbie

Princeton University ( email )

Paul S. Goldsmith-Pinkham

Yale School of Management ( email )

NY
United States

HOME PAGE: http://paulgp.github.io

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