IDEAS home Printed from https://ideas.repec.org/p/red/sed016/1424.html
   My bibliography  Save this paper

The Persistence of Financial Distress

Author

Listed:
  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

  • Jose Mustre-del-Rio

    (Federal Reserve Bank of Kansas City)

  • Kartik Athreya

    (Federal Reserve Bank of Richmond)

Abstract

How persistent is financial distress? We answer this question using data on the proximity to debt limits, household debt-income ratios, and the probability that given a past default, a household experiences repayment difficulties. We show that all of these measures indicate that household financial distress is an extremely persistent phenomenon. To what extent can standard theory, as represented by a basic incomplete-markets model in which consumers face state contingent borrowing limits, arising from default risk capture this observed persistence of financial distress? We show that the answer is “not well†: None of a wide array of model variants is capable of capturing this aspect of consumer credit use. This is important, as these baseline models have informed policy discussions on how best to provide debt relief to mitigate consumer financial distress. We then show that a plausible extension of standard approach yields a better account for the persistence of financial distress.

Suggested Citation

  • Juan Sanchez & Jose Mustre-del-Rio & Kartik Athreya, 2016. "The Persistence of Financial Distress," 2016 Meeting Papers 1424, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1424
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_1424.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
    2. Jonathan A. Parker, 2017. "Why Don't Households Smooth Consumption? Evidence from a $25 Million Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 153-183, October.
    3. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 149-185.
    4. Annamaria Lusardi & Daniel Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 83-150.
    5. Scott L. Fulford & Scott Schuh, 2017. "Credit card utilization and consumption over the life cycle and business cycle," Working Papers 17-14, Federal Reserve Bank of Boston.
    6. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2016. "Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(4), pages 628-649, December.
    7. Gary S. Becker & Casey B. Mulligan, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 729-758.
    8. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
    9. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
    10. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 77-153.
    11. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-353, July.
    12. Belzil, Christian & Hansen, Jörgen, 1999. "Subjective Discount Rates, Intergenerational Transfers and the Return to Schooling," IZA Discussion Papers 60, Institute of Labor Economics (IZA).
    13. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    14. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    15. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
    16. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    17. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
    18. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
    19. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
    20. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2016. "Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(4), pages 628-649, December.
    21. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
    22. Chatterjee, Satyajit & Corbae, Dean & Ríos-Rull, José-Víctor, 2008. "A finite-life private-information theory of unsecured consumer debt," Journal of Economic Theory, Elsevier, vol. 142(1), pages 149-177, September.
    23. Tullio Jappelli & Marco Pagano & Marco Di Maggio, 2013. "Households' indebtedness and financial fragility," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 23-46, January.
    24. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 77-153.
    25. Olga Gorbachev & María Jose Luengo-Prado, 2016. "The credit card debt puzzle: the role of preferences, credit risk, and financial literacy," Working Papers 16-6, Federal Reserve Bank of Boston.
    26. Jappelli, Tullio & Pagano, Marco, 1999. "The Welfare Effects of Liquidity Constraints," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 410-430, July.
    27. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
    28. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    29. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    30. Annamaria Lusardi, 2011. "Americans' Financial Capability," NBER Working Papers 17103, National Bureau of Economic Research, Inc.
    31. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. French, Declan, 2023. "Exploring household financial strain dynamics," International Review of Financial Analysis, Elsevier, vol. 86(C).
    2. Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2020. "Household Financial Distress and the Burden of ‘Aggregate’ Shocks," Research Working Paper RWP 20-13, Federal Reserve Bank of Kansas City.
    3. Balloch, Adnan & Engels, Christian & Philip, Dennis, 2022. "When It Rains It Drains: Psychological Distress and Household Net Worth," Journal of Banking & Finance, Elsevier, vol. 143(C).
    4. Kyle F. Herkenhoff & Gajendran Raveendranathan, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," Working Papers 2019-071, Human Capital and Economic Opportunity Working Group.
    5. Christa N. Gibbs & Benedict Guttman-Kenney & Donghoon Lee & Scott Nelson & Wilbert Van der Klaauw & Jialan Wang, 2024. "Consumer Credit Reporting Data," Staff Reports 1114, Federal Reserve Bank of New York.
    6. Mark Aguiar & Mark Bils & Corina Boar, 2020. "Who Are the Hand-to-Mouth?," Working Papers 2020-9, Princeton University. Economics Department..
    7. Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2019. "The Effects of Macroeconomic Shocks: Household Financial Distress Matters," Working Papers 2019-025, Federal Reserve Bank of St. Louis, revised 11 Sep 2023.
    8. Mark Aguiar & Corina Boar & Mark Bils, 2019. "Who Are the Hand-to-Mouth?," 2019 Meeting Papers 525, Society for Economic Dynamics.
    9. Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2019. "Consumption in the Great Recession: The Financial Distress Channel," Working Paper 19-13, Federal Reserve Bank of Richmond.
    10. Olga Gorbachev & María José Luengo-Prado, 2019. "The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 294-309, May.
    11. Amanda Wuth & Magdalena Cismaru, 2021. "A Conceptual and Operational Review of the Negative Financial Health Terminology and Constructs," International Business Research, Canadian Center of Science and Education, vol. 14(4), pages 1-1, April.
    12. Kyle Dempsey & Felicia Ionescu, 2021. "Lending Standards and Borrowing Premia in Unsecured Credit Markets," Finance and Economics Discussion Series 2021-039, Board of Governors of the Federal Reserve System (U.S.).
    13. Roth, Paula, 2020. "Inequality, Relative Deprivation and Financial Distress: Evidence from Swedish Register Data," Working Paper Series 1374, Research Institute of Industrial Economics.
    14. Kyle Dempsey & Felicia Ionescu, 2019. "Lending Standards and Consumption Insurance over the Business Cycle," 2019 Meeting Papers 1428, Society for Economic Dynamics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-193, April.
    2. David Laibson & Andrea Repetto & Jeremy Tobacman, 2005. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Levine's Bibliography 784828000000000643, UCLA Department of Economics.
    3. Gang Sun, 2012. "Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity," CDMA Working Paper Series 201310, Centre for Dynamic Macroeconomic Analysis, revised 26 Feb 2013.
    4. Diasakos, Theodoros M, 2013. "Comparative Statics of Asset Prices: the effect of other assets' risk," SIRE Discussion Papers 2013-94, Scottish Institute for Research in Economics (SIRE).
    5. Pavel K. Koval & Andrey V. Polbin, 2023. "Estimation of Heterogenous Consumption and Income Parameters," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 6, pages 76-92, December.
    6. Sun, Gang, 2013. "Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity," SIRE Discussion Papers 2013-96, Scottish Institute for Research in Economics (SIRE).
    7. Richard M. H. Suen, 2014. "Time Preference And The Distributions Of Wealth And Income," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 364-381, January.
    8. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.
    9. Svetlana Pashchenko & Ponpoje Porapakkarm, 2024. "Accounting For Social Security Claiming Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(1), pages 505-545, February.
    10. Kureishi, Wataru & Paule-Paludkiewicz, Hannah & Tsujiyama, Hitoshi & Wakabayashi, Midori, 2021. "Time preferences over the life cycle and household saving puzzles," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 123-139.
    11. Bulent Guler, 2015. "Innovations in Information Technology and the Mortgage Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 456-483, July.
    12. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    13. Tao Wang, 2023. "Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models," Staff Working Papers 23-59, Bank of Canada.
    14. Kyle Dempsey & Felicia Ionescu, 2019. "Lending Standards and Consumption Insurance over the Business Cycle," 2019 Meeting Papers 1428, Society for Economic Dynamics.
    15. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
    16. Antoine Bozio & Guy Laroque & Cormac O’Dea, 2017. "Discount rate heterogeneity among older households: a puzzle?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 30(2), pages 647-680, April.
    17. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
    18. Iwasa, Kazumichi & Zhao, Laixun, 2020. "Inequality and catching-up under decreasing marginal impatience," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 99-110.
    19. Crump, Richard K. & Eusepi, Stefano & Tambalotti, Andrea & Topa, Giorgio, 2022. "Subjective intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 118-133.
    20. Marieka M. Klawitter & C. Leigh Anderson & Mary Kay Gugerty, 2013. "Savings And Personal Discount Rates In A Matched Savings Program For Low-Income Families," Contemporary Economic Policy, Western Economic Association International, vol. 31(3), pages 468-485, July.

    More about this item

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed016:1424. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.