Consumer Debt Dynamics: Follow the Increasers

Consumer debt played a central role in creating the U.S. housing bubble, the ensuing housing downturn, and the Great Recession, and it has been blamed as a factor in the weak subsequent recovery as well. This paper uses micro-level data to decompose consumer debt dynamics by separating the actions of consumer debt increasers and decreasers, and then further decomposing movements into percentage and size margins among the increasers and decreasers. We view such a decomposition as informative for macroeconomic models featuring a central role for consumer debt. Using this framework, we show that variations in borrowing activity among the increasers explain four times as much of the total variation in consumer debt as variations among the decreasers who are shedding debt, whether through paydowns or defaults. We also provide micro-level evidence of a sharp decline in the percentage of increasers during the financial crisis that is qualitatively consistent with a binding zero lower bound on nominal interest rates, and evidence of a cycle in the average size of debt changes among the increasers that is related to rising collateral values pre-crisis coupled with additional financial frictions after the crisis.