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

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Listed:
  • Adrien Auclert
  • Will S. Dobbie
  • Paul Goldsmith-Pinkham

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

  • Adrien Auclert & Will S. Dobbie & Paul Goldsmith-Pinkham, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," NBER Working Papers 25685, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25685
    Note: CF EFG IFM ME
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    References listed on IDEAS

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    1. Foote, Christopher L. & Loewenstein, Lara & Willen, Paul S., 2016. "Cross-sectional patterns of mortgage debt during the housing boom: evidence and implications," Working Papers 16-12, Federal Reserve Bank of Boston.
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    3. Dupor, Bill & Karabarbounis, Marios & Kudlyak, Marianna & Mehkari, M. Saif, 2018. "Regional Consumption Responses and the Aggregate Fiscal Multiplier," Working Paper Series 2018-4, Federal Reserve Bank of San Francisco.
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    6. Gabriel Chodorow-Reich & Alp Simsek & Plamen Nenov, 2019. "Stock Market Wealth and the Real Economy: A Local Labor Market Approach," 2019 Meeting Papers 1240, Society for Economic Dynamics.
    7. Stephanie M. Wilshusen, 2011. "Meeting the demand for debt relief," Consumer Finance Institute discussion papers 11-04, Federal Reserve Bank of Philadelphia.
    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. Rodrigo Adão & Costas Arkolakis & Federico Esposito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," NBER Working Papers 25544, National Bureau of Economic Research, Inc.
    10. Emil Verner, 2018. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis," 2018 Meeting Papers 591, Society for Economic Dynamics.
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    Cited by:

    1. Gabriel Chodorow-Reich & Alp Simsek & Plamen Nenov, 2019. "Stock Market Wealth and the Real Economy: A Local Labor Market Approach," 2019 Meeting Papers 1240, Society for Economic Dynamics.

    More about this item

    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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