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Changing Household Financial Opportunities and Economic Security

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  • Karen E. Dynan

Abstract

Households have experienced an expansion of financial opportunities over the past several decades. Expanded financial opportunities, such as the democratization of credit and new lending approaches, can yield benefits in terms of household economic security. However, the financial crisis that began in 2007 has powerfully illustrated that expanded financial opportunities can also pose dangers for households. By increasing the scope for investment in risky assets, people may end up with larger swings in wealth than they had anticipated. Households may borrow too much and then face obligations that are unsustainable given their resources. To explore these issues, I examine household data on wealth, assets, and liabilities going back 25 years and, in some cases, 45 years. I argue that changes in household finances in the decades leading up to the mid-1990s -- including the gradual rise in indebtedness -- likely increased household well-being, on balance, and contributed to a decline in aggregate economic volatility. However, changes in finances since the mid-1990s -- in particular, a much sharper rate of increase in household debt -- appear to have been destabilizing for many individual households and ultimately for the economy as a whole. I consider how the lessons learned in the current crisis might change household financial opportunities and choices going forward.

Suggested Citation

  • Karen E. Dynan, 2009. "Changing Household Financial Opportunities and Economic Security," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 49-68, Fall.
  • Handle: RePEc:aea:jecper:v:23:y:2009:i:4:p:49-68
    Note: DOI: 10.1257/jep.23.4.49
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    References listed on IDEAS

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    Cited by:

    1. Matthew J. Eichner & Donald L. Kohn & Michael G. Palumbo, 2010. "Financial statistics for the United States and the crisis: what did they get right, what did they miss, and how should they change?," Finance and Economics Discussion Series 2010-20, Board of Governors of the Federal Reserve System (U.S.).
    2. Meng, Channarith, 2014. "Consumer Loans in Cambodia: Implications on Banking Stability," MPRA Paper 54131, University Library of Munich, Germany.
    3. Fenaba Addo, 2014. "Debt, Cohabitation, and Marriage in Young Adulthood," Demography, Springer;Population Association of America (PAA), vol. 51(5), pages 1677-1701, October.
    4. Jing Jian Xiao & Rui Yao, 2011. "Debt Holding and Burden by Family Structure in 1989-2007," NFI Working Papers 2011-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    5. Zhan, Min & Xiang, Xiaoling & Elliott, William, 2016. "Education loans and wealth building among young adults," Children and Youth Services Review, Elsevier, vol. 66(C), pages 67-75.
    6. Hojman, Daniel A. & Miranda, Álvaro & Ruiz-Tagle, Jaime, 2016. "Debt trajectories and mental health," Social Science & Medicine, Elsevier, vol. 167(C), pages 54-62.
    7. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 1-56.
    8. Jing Jian Xiao & Rui Yao, 2011. "Consumer Debt Delinquency over Life Cycle Stages," NFI Working Papers 2011-WP-18, Indiana State University, Scott College of Business, Networks Financial Institute.
    9. Matthew J. Eichner & Donald L. Kohn & Michael G. Palumbo, 2013. "Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Could They Change?," NBER Chapters,in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, pages 39-66 National Bureau of Economic Research, Inc.
    10. G. Terrier & Rodrigo O. Valdes & Camilo E Tovar Mora & Jorge A Chan-Lau & Carlos Fernandez Valdovinos & Mercedes Garcia-Escribano & Carlos I. Medeiros & Man-Keung Tang & Mercedes Vera Martin & W. Chri, 2011. "Policy Instruments to Lean Against the Wind in Latin America," IMF Working Papers 11/159, International Monetary Fund.
    11. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
    12. Lusardi, Annamaria & Mitchell, Olivia S. & Oggero, Noemi, 2017. "Debt and financial vulnerability on the verge of retirement," CFS Working Paper Series 574, Center for Financial Studies (CFS).
    13. Victor Stango & Jonathan Zinman, 2013. "Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs," NBER Working Papers 19069, National Bureau of Economic Research, Inc.
    14. Fenaba R. Addo, 2017. "Financial Integration and Relationship Transitions of Young Adult Cohabiters," Journal of Family and Economic Issues, Springer, vol. 38(1), pages 84-99, March.
    15. Daniel Hojman & Alvaro Miranda & Jaime Ruiz-Tagle, 2013. "Over Indebtedness and Depression: Sad Debt or Sad Debtors?," Working Papers wp385, University of Chile, Department of Economics.
    16. Lawrence M. Berger & J. Michael Collins & Laura Cuesta, 2016. "Household Debt and Adult Depressive Symptoms in the United States," Journal of Family and Economic Issues, Springer, vol. 37(1), pages 42-57, March.
    17. Mary Eschelbach Hansen & Julie Routzahn, 2014. "Gender Differences in Attitudes Toward Debt and Financial Position: The Impact of the Great Recession," Working Papers 2014-10, American University, Department of Economics.
    18. Paulina Anioła & Zbigniew Gołaś, 2012. "Differences in the Level and Structure of Household Indebtedness in the EU Countries," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(1), March.
    19. International Monetary Fund, 2010. "Japan; Selected Issues," IMF Staff Country Reports 10/212, International Monetary Fund.
    20. Daniel H. Cooper & Karen E. Dynan, 2013. "Wealth shocks and macroeconomic dynamics," Public Policy Discussion Paper 13-4, Federal Reserve Bank of Boston.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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