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

Multiple version iconThere are 3 versions of this paper

Date Written: 2019-09-17

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, Consumption in the Great Recession: The Financial Distress Channel (2019-09-17). FRB St. Louis Working Paper No. 2019-25. Available at SSRN: https://ssrn.com/abstract=3473132 or http://dx.doi.org/10.20955/wp.2019.025

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

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