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Household Leverage and the Recession

Author

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  • Callum Jones
  • Virgiliu Midrigan
  • Mr. Thomas Philippon

Abstract

We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Suggested Citation

  • Callum Jones & Virgiliu Midrigan & Mr. Thomas Philippon, 2018. "Household Leverage and the Recession," IMF Working Papers 2018/194, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/194
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    More about this item

    Keywords

    WP; interest rate; household debt; Great Recession; Regional Evidence; Zero Lower Bound; credit shock; equilibrium interest rate; implied rate; fed funds rate; nominal interest rate; home equity; marginal utility; min consumption ratio; household credit limit; consumption ratio; precautionary savings motive; market value; Employment; Credit; Consumption; Consumer credit;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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