Household Leverage and the Recession
IMF Working Papers, August 30, 2018
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- Household Leverage and the Recession
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Bibliographic details
- Authors: Callum Jones, Virgiliu Midrigan, Thomas Philippon
- Published: August 30, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484373866.001
Summary and central findings
- The paper evaluates and partially challenges the "household leverage" view of the Great Recession.
- Empirical observation: employment and consumption declined more in states where household debt declined more.
- Model conclusion: 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.
- Recovery dynamic: because household deleveraging was gradual, credit shocks greatly slowed the recovery.
Model and methods
- The authors study a model where liquidity constraints amplify the response of consumption and employment to changes in debt.
- Estimation approach: Bayesian methods combining state and aggregate data.
Quantitative results and key statistics
- Changes in household credit limits explain 40 percent of cross-state employment differentials.
- The aggregate employment decline period considered: 2008-2010.
- Document length: 51 pages.
- Publication metadata:
- Volume: 2018
- Issue: 194
- Series: Working Paper No. 2018/194
- DOI: https://doi.org/10.5089/9781484373866.001
- Stock No: WPIEA2018194
- ISBN: 9781484373866
- ISSN: 1018-5941
Policy-relevant implications
- Liquidity constraints and household credit limits are important drivers of heterogeneous state-level outcomes during the recession.
- While credit-limit shocks accounted for a modest share of the aggregate employment decline in 2008-2010, they played a significant role in slowing the recovery due to gradual household deleveraging.
- Policy focus on restoring or supporting household credit access could materially affect the pace of recovery following credit-driven downturns.
Subjects and keywords covered
- Subjects: 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
IMF Working Paper: Callum Jones, Virgiliu Midrigan, Thomas Philippon — "Household Leverage and the Recession" (2018), Working Paper No. 2018/194, 51 pages, DOI: https://doi.org/10.5089/9781484373866.001
Content in this bundle
- Household Leverage and the Recession, WP/18/194, August 2018