Household Financial Distress and the Burden of 'Aggregate' Shocks

76 Pages Posted: 2 Oct 2020

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

Date Written: September, 2020

Abstract

The goal of this paper is to show that household-level financial distress (FD) varies greatly, meaning there is unequal exposure to macroeconomic risk, and that FD can increase macroeconomic vulnerability. To do this, we first establish three facts: (i) regions in the U.S. vary significantly in their "FD-intensity," measured either by how much additional credit households therein can access, or in how delinquent they typically are on debts, (ii) shocks that are typically viewed as "aggregate" in nature hit geographic areas quite differently, and (iii) FD is an economic "pre-existing condition": the share of an aggregate shock borne by a region is positively correlated with the level of FD present at the time of the shock. Using an empirically disciplined and institutionally rich model of consumer debt and default, we show that in the shocks dealt by the Great Recession and in the initial months in the COVID-19 pandemic, FD mattered. Our model implies that the uneven distribution of FD creates widely varying consumption responses to shocks. This is true even when subjecting regions (with differing levels of FD) to the same shocks, which highlights the importance of FD independently of its correlation with shocks.

Keywords: Geography, Consumption, Credit Card Debt, Reccession, Bankruptcy, Foreclosure, Mortgage, Delinquency, Financial Distress

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

Suggested Citation

Athreya, Kartik and Mather, Ryan and Mustre-del-Rio, Jose and Sanchez, Juan M., Household Financial Distress and the Burden of 'Aggregate' Shocks (September, 2020). FRB Richmond Working Paper No. 20-12, Available at SSRN: https://ssrn.com/abstract=3701998 or http://dx.doi.org/10.21144/wp20-12

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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