Consumption in the Great Recession: The Financial Distress Channel

65 Pages Posted: 22 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

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 3 versions of this paper

Date Written: August 27, 2019

Abstract

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

Suggested Citation

Athreya, Kartik and Mather, Ryan and Mustre-del-Rio, Jose and Sanchez, Juan M., Consumption in the Great Recession: The Financial Distress Channel (August 27, 2019). FRB Richmond Working Paper No. 19-13. Available at SSRN: https://ssrn.com/abstract=3473119

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. Sanchez

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

411 Locust St
Saint Louis, MO 63011
United States

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