Household Leverage and the Recession
A salient feature of the Great Recession is that regions that experienced larger declines in household debt also experienced larger declines in employment. We study a model in which liquidity constraints amplify the response of employment to changes in debt. We estimate the model using panel data on consumption, employment, wages and debt for U.S. states. Though successful in matching the cross-sectional evidence, the model predicts that deleveraging cannot, by itself, account for the large drop in aggregate employment in the U.S. The 25% decline in household debt observed in the data leads to a modest 1.5% drop in the natural rate of interest, and is easily offset by monetary policy. Household deleveraging is more potent, however, in the presence of other shocks that trigger the zero lower bound on interest rates. In the presence of such shocks household deleveraging accounts for about half of the decline in U.S. employment.
|Date of creation:||Apr 2011|
|Date of revision:|
|Note:||AP EFG ME|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
- Emi Nakamura & Jón Steinsson, 2011.
"Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions,"
NBER Working Papers
17391, National Bureau of Economic Research, Inc.
- Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, vol. 104(3), pages 753-92, March.
- Cúrdia, Vasco & Woodford, Michael, 2009.
"Conventional and Unconventional Monetary Policy,"
CEPR Discussion Papers
7514, C.E.P.R. Discussion Papers.
- Kaplan, Greg & Violante, Giovanni L, 2011.
"A Model of the Consumption Response to Fiscal Stimulus Payments,"
CEPR Discussion Papers
8562, C.E.P.R. Discussion Papers.
- Gianluca Violante & Greg Kaplan, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," 2011 Meeting Papers 243, Society for Economic Dynamics.
- Greg Kaplan & Giovanni L. Violante, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," NBER Working Papers 17338, National Bureau of Economic Research, Inc.
- Karl E. Case & John M. Quigley & Robert J. Shiller, 2011.
"Wealth Effects Revisited 1978-2009,"
Cowles Foundation Discussion Papers
1784, Cowles Foundation for Research in Economics, Yale University.
- Guido Lorenzoni & Veronica Guerrieri, 2011.
"Credit Crises, Precautionary Savings and the Liquidity Trap,"
2011 Meeting Papers
1414, Society for Economic Dynamics.
- Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
- Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16965. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.