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Consumption response to aggregate shocks and the role of leverage

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  • Agnes Kovacs
  • May Rostom
  • Philip Bunn

Abstract

This paper investigates the relationship between mortgage leverage and consumption around the 2008 financial crisis. Using data from the UK's Family Expenditure Survey and Wealth and Asset Survey, we first show that high‐leveraged households made larger cuts to consumption following the financial crisis, and this was largely driven by young households. Second, using a life‐cycle framework, we qualitatively evaluate four possible channels that could explain the observed positive relationship between consumption and leverage: income, uncertainty, credit supply and house price channels. Our key finding is that credit supply tightening is the main driver of the empirical co‐movement between pre‐crisis leverage and consumption growth after 2008.

Suggested Citation

  • Agnes Kovacs & May Rostom & Philip Bunn, 2025. "Consumption response to aggregate shocks and the role of leverage," Manchester School, University of Manchester, vol. 93(1), pages 30-69, January.
    • Handle: RePEc:bla:manchs:v:93:y:2025:i:1:p:30-69
    DOI: 10.1111/manc.12495
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    2. Sala, Hector & Trivín, Pedro, 2022. "Family Finances and Debt Overhang: Evolving Consumption Patterns of Spanish Households," IZA Discussion Papers 15222, IZA Network @ LISER.
    3. Sala, Hector & Trivin, Pedro, 2024. "Household finances, debt overhang and consumption patterns," Economic Modelling, Elsevier, vol. 139(C).
    4. Zhang, Dongyang & Guo, Rui, 2020. "The consumption response to household leverage in China: The role of investment at household level," International Review of Financial Analysis, Elsevier, vol. 71(C).
    5. Albuquerque, Bruno & Green, Georgina, 2023. "Financial concerns and the marginal propensity to consume in COVID times: Evidence from UK survey data," Journal of Macroeconomics, Elsevier, vol. 78(C).
    6. Nakajima, Jouchi, 2020. "The role of household debt heterogeneity on consumption: Evidence from Japanese household data," Economic Analysis and Policy, Elsevier, vol. 65(C), pages 186-197.
    7. Apostolos Fasianos & Reamonn Lydon, 2022. "Do households with debt cut back their consumption more? New evidence from the United Kingdom," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 737-760, July.
    8. Bank for International Settlements, 2022. "Private sector debt and financial stability," CGFS Papers, Bank for International Settlements, number 67.
    9. Belinda Tracey & Neeltje Van Horen, 2021. "The consumption response to borrowing constraints in the mortgage market," Bank of England working papers 919, Bank of England.

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    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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