IMF Working Papers

Household Leverage and the Recession

By Callum Jones, Virgiliu Midrigan, Thomas Philippon

August 30, 2018

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Callum Jones, Virgiliu Midrigan, and Thomas Philippon. Household Leverage and the Recession, (USA: International Monetary Fund, 2018) accessed December 5, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Subject: Consumer credit, Consumption, Credit, Employment, Financial services, Labor, Money, National accounts, Zero lower bound

Keywords: Consumer credit, Consumption, Consumption ratio, Credit, Credit shock, Employment, Equilibrium interest rate, Fed funds rate, Great Recession, Home equity, Household credit limit, Household debt, Implied rate, Interest rate, Marginal utility, Market value, Min consumption ratio, Nominal interest rate, Precautionary savings motive, Regional Evidence, WP, Zero Lower Bound

Publication Details

  • Pages:

    51

  • Volume:

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  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2018/194

  • Stock No:

    WPIEA2018194

  • ISBN:

    9781484373866

  • ISSN:

    1018-5941