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Labor Market Upheaval, Default Regulation, and Consumer Debt

Listed author(s):
  • Kartik Arthreya

    (Federal Reserve Bank of Richmond)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

  • Xuan Tam

    (City University, Hong Kong)

  • Eric Young

    (University of Virginia)

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment. By contrast, informal default through delinquency rose sharply. In the subsequent recovery, households have been widely viewed as "deleveraging" (Mian and Sufi 2011, Krugman and Eggertson 2012) via the largest reduction of unsecured debt seen in the past three decades. We measure the relative roles of recent bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession. Our results suggest that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2014.08.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 18 (2015)
Issue (Month): 1 (January)
Pages: 32-52

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Handle: RePEc:red:issued:14-30
DOI: 10.1016/j.red.2014.08.001
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  1. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  2. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
  3. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
  4. James X. Sullivan, 2008. "Borrowing During Unemployment: Unsecured Debt as a Safety Net," Journal of Human Resources, University of Wisconsin Press, vol. 43(2), pages 383-412.
  5. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
  6. Chatterjee, Satyajit & Gordon, Grey, 2012. "Dealing with consumer default: Bankruptcy vs garnishment," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 1-16.
  7. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
  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. Daphne Chen & Jake Zhao, 2017. "The Impact of Personal Bankruptcy on Labor Supply Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 40-61, October.
  10. Atif Mian & Amir Sufi, 2010. "Household Leverage and the Recession of 2007–09," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 74-117, August.
  11. Atif R. Mian & Amir Sufi, 2010. "Household Leverage and the Recession of 2007 to 2009," NBER Working Papers 15896, National Bureau of Economic Research, Inc.
  12. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  13. Grey Gordon, 2015. "Evaluating default policy: The business cycle matters," Quantitative Economics, Econometric Society, vol. 6(3), pages 795-823, November.
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