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

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  • 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
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    References listed on IDEAS

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    Cited by:

    1. Òscar Jordà & Martin Kornejew & Moritz Schularick & Alan M. Taylor, 2020. "Zombies at Large? Corporate Debt Overhang and the Macroeconomy," NBER Working Papers 28197, National Bureau of Economic Research, Inc.
    2. António R. Antunes & Tiago Cavalcanti & Caterina Mendicino & Marcel Peruffo & Anne Villamil, 2019. "Tighter Credit and Consumer Bankruptcy Insurance," Working Papers w201921, Banco de Portugal, Economics and Research Department.
    3. Chodorow-Reich, Gabriel, 2020. "Regional data in macroeconomics: Some advice for practitioners," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    4. 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.
    5. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    6. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    7. Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2018. "Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy," NBER Working Papers 25149, National Bureau of Economic Research, Inc.

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    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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