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Consumer Debt Dynamics: Follow the Increasers

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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.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1401.

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Length: 48 pages
Date of creation: 21 Mar 2014
Date of revision:
Handle: RePEc:fip:fedcwp:1401

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Keywords: consumer debt; deleveraging; zero lower bound; increasers; decreasers;

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  1. Kathleen W. Johnson & Geng Li, 2010. "The Debt-Payment-to-Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(7), pages 1373-1390, October.
  2. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  3. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 149-185, February.
  4. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-88, Wharton School Rodney L. White Center for Financial Research.
  5. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2013. "Household Leveraging and Deleveraging," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9671, C.E.P.R. Discussion Papers.
  6. Robert E. Hall, 2011. "The Long Slump," NBER Working Papers 16741, National Bureau of Economic Research, Inc.
  7. Jean Imbs & Giovanni Favara, 2011. "Credit Supply and the Price of Housing," 2011 Meeting Papers 1342, Society for Economic Dynamics.
  8. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  9. Edward S. Knotek II & John Carter Braxton, 2012. "What drives consumer debt dynamics?," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV.
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