Consumption in the Great Recession: The Financial Distress Channel

65 Pages Posted: 21 Oct 2019

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Ryan Mather

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Jose Mustre-del-Rio

Federal Reserve Bank of Kansas City

Juan M. Sánchez Céspedes

Universidad Distrital Francisco José de Caldas, Carrera 7 No. 40B-53. Bogotá D.C, Colombia.

Multiple version iconThere are 3 versions of this paper

Date Written: September 11, 2019

Abstract

During the Great Recession, the collapse of consumption across the U.S. varied greatly but systematically with house-price declines. We find that financial distress among U.S. households amplified the sensitivity of consumption to house-price shocks. We uncover two essential facts:

(1) the decline in house prices led to an increase in household financial distress prior to the decline in income during the recession, and

(2) at the zip-code level, the prevalence of financial distress prior to the recession was positively correlated with house-price declines at the onset of the recession.

Using a rich-estimated-dynamic model to measure the financial distress channel, we find that these two facts amplify the aggregate drop in consumption by 7 percent and 45 percent respectively.

Keywords: Consumption, Credit Card, Mortgage, Bankruptcy, Foreclosure, Delinquency, Financial Distress, Great Recession

JEL Classification: D31, D58, E21, E44, G11, G12, G21

Suggested Citation

Athreya, Kartik and Mather, Ryan and Mustre-del-Rio, Jose and M. Sánchez Céspedes, Juan, Consumption in the Great Recession: The Financial Distress Channel (September 11, 2019). Federal Reserve Bank of Kansas City Working Paper No. 19-06. Available at SSRN: https://ssrn.com/abstract=3472057 or http://dx.doi.org/10.2139/ssrn.3472057

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Ryan Mather

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jose Mustre-del-Rio

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Juan M. Sánchez Céspedes

Universidad Distrital Francisco José de Caldas, Carrera 7 No. 40B-53. Bogotá D.C, Colombia. ( email )

Carrera 7 No. 40-53
Bogotá
Colombia

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