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Labor market upheaval, default regulations, and consumer debt

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In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as ?develeraging? (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have ?worked.? We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate.

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  • Kartik B. Athreya & Juan M. Sanchez & Xuan S. Tam & Eric R. Young, 2014. "Labor market upheaval, default regulations, and consumer debt," Working Papers 2014-2, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2014-002
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    1. Kartik Athreya & Juan M. Sánchez & Xuan S. Tam & Eric R. Young, 2018. "Bankruptcy And Delinquency In A Model Of Unsecured Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 593-623, May.
    2. Veronica Guerrieri & Guido Lorenzoni, 2017. "Credit Crises, Precautionary Savings, and the Liquidity Trap," The Quarterly Journal of Economics, Oxford University Press, vol. 132(3), pages 1427-1467.
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    4. 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.
    5. Atif Mian & Amir Sufi, 2011. "Household Leverage and the Recession of 2007 to 2009," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 7, pages 125-173.
    6. 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.
    7. 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.
    8. Chatterjee, Satyajit & Gordon, Grey, 2012. "Dealing with consumer default: Bankruptcy vs garnishment," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 1-16.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. 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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    Cited by:

    1. Kyle Herkenhoff & Lee Ohanian, 2019. "The Impact of Foreclosure Delay on U.S. Employment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 63-83, January.
    2. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," Review of Economic Studies, Oxford University Press, vol. 86(6), pages 2605-2642.
    3. Gordon, Grey, 2017. "Optimal bankruptcy code: A fresh start for some," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 123-149.
    4. Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2019. "Household Financial Distress and the Burden of “Aggregate” Shocks," Working Papers 2019-025, Federal Reserve Bank of St. Louis, revised 10 Sep 2020.
    5. Madeira, Carlos, 2019. "Measuring the covariance risk of consumer debt portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 21-38.
    6. Kyle Herkenhoff, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," 2016 Meeting Papers 781, Society for Economic Dynamics.
    7. Antonio Antunes & Valerio Ercolani, 2020. "Public debt expansions and the dynamics of the household borrowing constraint," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 1-32, July.
    8. Kartik Athreya & Juan M. Sánchez & Xuan S. Tam & Eric R. Young, 2018. "Bankruptcy And Delinquency In A Model Of Unsecured Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 593-623, May.
    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. Madeira, Carlos, 2018. "Explaining the cyclical volatility of consumer debt risk using a heterogeneous agents model: The case of Chile," Journal of Financial Stability, Elsevier, vol. 39(C), pages 209-220.
    11. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    12. Jiseob Kim, 2020. "How Unsecured Credit Policies Influence Mortgage and Unsecured Loan Defaults," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1271-1304, August.
    13. Meir Russ, 2017. "The Trifurcation of the Labor Markets in the Networked, Knowledge-Driven, Global Economy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(2), pages 672-703, June.
    14. Gordon, Grey, 2017. "Optimal bankruptcy code: A fresh start for some," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 123-149.
    15. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output," Working Papers 16-25, Center for Economic Studies, U.S. Census Bureau.
    16. Exler, Florian, 2015. "Personal bankruptcy and wage garnishment," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113219, Verein für Socialpolitik / German Economic Association.
    17. Paulo Rogério Faustino Matos, 2019. "The role of household debt and delinquency decisions in consumption-based asset pricing," Annals of Finance, Springer, vol. 15(2), pages 179-203, June.
    18. Kyle Herkenhoff & Lee Ohanian, 2019. "The Impact of Foreclosure Delay on U.S. Employment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 63-83, January.
    19. J. Carter Braxton & Gordon Phillips & Kyle Herkenhoff, 2018. "Can the Unemployed Borrow? Implications for Public Insurance," 2018 Meeting Papers 564, Society for Economic Dynamics.
    20. Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," 2018 Meeting Papers 112, Society for Economic Dynamics.
    21. Carlos Madeira, 2016. "Explaining the Cyclical Volatility of Consumer Debt Risk," Working Papers Central Bank of Chile 772, Central Bank of Chile.
    22. Laura Argys & Andrew Friedson & M. Melinda Pitts, 2016. "Killer Debt: The Impact of Debt on Mortality," FRB Atlanta Working Paper 2016-14, Federal Reserve Bank of Atlanta.

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    More about this item

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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