Consumption in the Great Recession: The Financial Distress Channel
65 Pages Posted: 21 Oct 2019
Date Written: September 11, 2019
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
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