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Household Leverage and the Recession

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  • Callum Jones

    (International Monetary Fund)

Abstract

During the Great Recession, employment declined more in regions where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model using Bayesian likelihood methods on state-level and aggregate data. Credit shocks account well for the differential rise and fall of employment across individual states. Credit shocks explain a smaller fraction of the initial drop in aggregate employment but the tightening of household credit greatly contributes to the slow recovery in the aftermath of recession.

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  • Callum Jones, 2018. "Household Leverage and the Recession," 2018 Meeting Papers 933, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:933
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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