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Household Leverage and the Recession

  • Thomas Philippon


  • Virgiliu Midrigan

    (New York University)

A salient feature of the recent recession is that regions that have experienced the largest changes in household leverage have also experienced the largest declines in output and employment. We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions. Declines in home prices tighten the cash-in-advance constraint, triggering recessions. We parameterize the model to match the key cross-sectional features of the data. The model implies that real activity is very sensitive to liquidity shocks, but not to credit shocks, and that monetary policy can significantly reduce the severity of credit-driven recessions.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 335.

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Date of creation: 2013
Date of revision:
Handle: RePEc:red:sed013:335
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. 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.
  2. Vasco Cúrdia & Michael Woodford, 2009. "Conventional and unconventional monetary policy," Staff Reports 404, Federal Reserve Bank of New York.
  3. 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.
  4. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  5. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1371-1406.
  6. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  8. Kurt Mitman & Gianluca Violante & Greg Kaplan, 2015. "Consumption and House Prices in the Great Recession: Model Meets Evidence," 2015 Meeting Papers 275, Society for Economic Dynamics.
  9. Fatih Guvenen & Anthony Smith, 2013. "Inferring labor income risk and partial insurance from economic choices," Staff Report 485, Federal Reserve Bank of Minneapolis.
  10. 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.
  11. 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.
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