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Household Financial Distress and the Burden of ‘Aggregate’ Shocks

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Listed:
  • Kartik B. Athreya
  • Ryan Mather
  • Jose Mustre-del-Rio
  • Juan M. Sanchez

Abstract

In this paper we show that household-level financial distress (FD) varies greatly and can increase vulnerability to economic shocks. To do this, we establish three facts: (i) regions in the United States vary significantly in their “FD-intensity,” measured either by how much additional credit households can access or how delinquent they are on debts, (ii) shocks that are typically viewed as “aggregate” in nature hit geographic areas quite differently, and (iii) FD is an economic “pre-existing condition”: the share of an aggregate shock borne by a region is positively correlated with the level of FD present at the time of the shock. Using an empirically disciplined and institutionally rich model of consumer debt and default, we show that in the shocks dealt by the Great Recession and the initial months of the COVID-19 pandemic, FD had quantitative significance for consumption. Our model suggests that the uneven distribution of FD creates widely varying consumption responses to shocks. This is true even when subjecting regions with differing levels of FD to the same shocks.

Suggested Citation

  • Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2020. "Household Financial Distress and the Burden of ‘Aggregate’ Shocks," Research Working Paper RWP 20-13, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:88852
    DOI: 10.18651/RWP2020-13
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Credit card debt; Bankruptcy; Recession; Foreclosure; Mortgages; Delinquency; Financial distress; Geography;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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