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Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession

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  • Auclert, Adrien
  • Dobbie, Will
  • Goldsmith-Pinkham, Paul

Abstract

This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.

Suggested Citation

  • Auclert, Adrien & Dobbie, Will & Goldsmith-Pinkham, Paul, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," CEPR Discussion Papers 13598, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13598
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    Cited by:

    1. Òscar Jordà & Martin Kornejew & Moritz Schularick & Alan M. Taylor, 2020. "Zombies at Large? Corporate Debt Overhang and the Macroeconomy," NBER Working Papers 28197, National Bureau of Economic Research, Inc.
    2. Benjamin J. Keys & Neale Mahoney & Hanbin Yang, 2020. "What Determines Consumer Financial Distress? Place- and Person-Based Factors," NBER Working Papers 26808, National Bureau of Economic Research, Inc.
    3. Mendicino, Caterina & Cavalcanti, Tiago & Antunes, Antonio & Peruffo, Marcel & Villamil, Anne, 2021. "Tighter Credit and Consumer Bankruptcy Insurance," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242407, Verein für Socialpolitik / German Economic Association.
    4. Piskorski, Tomasz & Seru, Amit, 2021. "Debt relief and slow recovery: A decade after Lehman," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1036-1059.
    5. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    6. Chodorow-Reich, Gabriel, 2020. "Regional data in macroeconomics: Some advice for practitioners," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    7. António R. Antunes & Tiago Cavalcanti & Caterina Mendicino & Marcel Peruffo & Anne Villamil, 2019. "Tighter Credit and Consumer Bankruptcy Insurance," Working Papers w201921, Banco de Portugal, Economics and Research Department.
    8. , 2020. "Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States," Working Papers 20-20, Federal Reserve Bank of Philadelphia.
    9. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    10. Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2018. "Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy," NBER Working Papers 25149, National Bureau of Economic Research, Inc.
    11. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    12. Carlino, Gerald & Drautzburg, Thorsten & Inman, Robert & Zarra, Nicholas, 2020. "Partisanship and Fiscal Policy in Federal Unions: Evidence from US States," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224550, Verein für Socialpolitik / German Economic Association.
    13. Gabriel Chodorow-Reich & Plamen T. Nenov & Alp Simsek, 2021. "Stock Market Wealth and the Real Economy: A Local Labor Market Approach," American Economic Review, American Economic Association, vol. 111(5), pages 1613-1657, May.
    14. Sylvain Catherine & Constantine Yannelis, 2020. "The Distributional Effects of Student Loan Forgiveness," Working Papers 2020-169, Becker Friedman Institute for Research In Economics.
    15. repec:ajk:ajkpbs:024 is not listed on IDEAS

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    More about this item

    Keywords

    Consumer bankruptcy; micro to macro; regional multipliers;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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