Consumption in the Great Recession: The Financial Distress Channel
65 Pages Posted: 22 Oct 2019
Date Written: August 27, 2019
During the Great Recession, the collapse of consumption across the US varied greatly but systematically with house-price declines. Our message is that household financial health matters for understanding this relationship. Two facts are essential for our finding: (1) the decline in house prices led to an increase in household financial distress (FD) prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of FD prior to the recession was positively correlated with house-price declines at the onset of the recession. We measure the power of the financial distress channel using a rich-estimated-dynamic model of FD. We find that these channels amplify the aggregate drop in consumption by 7% and 45%, respectively.
Keywords: Consumption, Credit Card, Mortgage, Bankruptcy, Fore- closure, Delinquency, Financial Distress, Great Recession
JEL Classification: D31, D58, E21, E44, G11, G12, G21
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