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The economics of household leveraging and deleveraging

Author

Listed:
  • Wenli Li
  • Susheela Patwari

Abstract

Since the start of the financial crisis of 2007-09, a historically large number of household loans have become delinquent and residential houses have been foreclosed. This situation, coupled with households actively paying down their debt or cutting down on new borrowing, marked the beginning of household deleveraging. In this article, Wenli Li and Susheela Patwari discuss recent theoretical and empirical work by economists that sheds light on the process of leveraging and deleveraging and that helps to provide answers to a number of questions, such as: What determines when and how much a household borrows? What helps account for the widely noted increase in consumer debt levels in the run-up to the financial crisis? Finally, how has deleveraging progressed, and what are the implications for consumption and the broader economy?

Suggested Citation

  • Wenli Li & Susheela Patwari, 2012. "The economics of household leveraging and deleveraging," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 9-17.
    • Handle: RePEc:fip:fedpbr:y:2012:i:q3:p:9-17
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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2012/q3/brq312_economics-of-household-leveraging-deleveraging.pdf
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    References listed on IDEAS

    as
    1. Wenli Li & Fang Yang, 2010. "American dream or American obsession? The economic benefits and costs of homeownership," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 20-30.
    2. Elul, Ronel, 2008. "Collateral, credit history, and the financial decelerator," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 63-88, January.
    3. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January.
    4. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    5. Giovanni Dell’ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    6. Michael Dotsey & Wenli Li & Fang Yang, 2014. "Consumption And Time Use Over The Life Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(3), pages 665-692, August.
    7. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 163-193.
    8. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    9. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 307-362.
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