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Household Leverage and the Recession of 2007–09

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  • Atif Mian
  • Amir Sufi

Abstract

This paper shows that household leverage as of 2006 is a powerful statistical predictor of the severity of the 2007–09 recession across U.S. counties. Those counties that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006—a full year before the official beginning of the recession in the fourth quarter of 2007. Similarly, counties with the highest reliance on credit card borrowing reduced durable consumption by significantly more following the financial crisis of the fall of 2008. Overall, the statistical model shows that household leverage growth and dependence on credit card borrowing as of 2006 explain a large fraction of the overall consumer default, house price, unemployment, residential investment, and durable consumption patterns during the recession. The findings suggest that a focus on household finance may help elucidate the sources of macroeconomic fluctuations.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 58 (2010)
Issue (Month): 1 (August)
Pages: 74-117

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Handle: RePEc:pal:imfecr:v:58:y:2010:i:1:p:74-117

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Cited by:
  1. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2013. "When Credit Bites Back," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 3-28, December.
  2. Jappelli, Tullio & Pistaferri, Luigi, 2013. "Fiscal Policy and MPC Heterogeneity," CEPR Discussion Papers 9333, C.E.P.R. Discussion Papers.
  3. Òscar Jordà & Moritz HP. Schularick & Alan M. Taylor, 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," NBER Working Papers 17621, National Bureau of Economic Research, Inc.
  4. Carter, Justin & Moore, Winston & Jackman, Mahalia, 2012. "Is the Magnitude of Household Debt in Barbados a Concern?," MPRA Paper 47791, University Library of Munich, Germany.
  5. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2013. "Sovereigns versus Banks: Credit, Crises, and Consequences," CESifo Working Paper Series 4431, CESifo Group Munich.
  6. Janet Currie & Erdal Tekin, 2011. "Is there a Link Between Foreclosure and Health?," NBER Working Papers 17310, National Bureau of Economic Research, Inc.
  7. Gelain, Paolo & Lansing, Kevin J. & Mendicino, Caterina, 2012. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," Dynare Working Papers 21, CEPREMAP.
  8. Amir Sufi, 2012. "Detecting "Bad" Leverage," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling National Bureau of Economic Research, Inc.
  9. Atif Mian & Amir Sufi, 2010. "The Great Recession: Lessons from Microeconomic Data," American Economic Review, American Economic Association, vol. 100(2), pages 51-56, May.
  10. Amir Sufi, 2012. "Commentary: redistributive monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 385-396.
  11. Athreya, Kartik B. & Sanchez, Juan M. & Tam, Xuan S. & Young, Eric R., 2014. "Labor market upheaval, default regulations, and consumer debt," Working Papers 2014-2, Federal Reserve Bank of St. Louis.

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