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Aggregate Implications of Household Financial Distress

Author

Listed:
  • Kartik Athreya

    (Federal Reserve Bank of Richmond)

  • Jose Mustre-del-Rio

    (Federal Reserve Bank of Kansas City)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

Abstract

The goal of this paper is to provide an empirical and quantitative assessment of the importance of household financial distress for the transmission of shocks from housing wealth to consumption during the Great Recession. We first merge several sources to obtain a new data set of county-level information about households balance sheets and auto purchases. We use this new data set to show two facts: (1) areas with higher household financial distress exhibit a larger marginal propensity to consume out of home value show, and (2) areas with higher household financial distress faced a larger housing net worth shock during the period 2006-2009. Second, we provide suggestive empirical evidence that (1) and (2) were important to understand the dynamics of consumption during the Great Recession. Third, we corroborate our empirical evidence in a life cycle model with mortgage default and defaultable financial (unsecured) debt.

Suggested Citation

  • Kartik Athreya & Jose Mustre-del-Rio & Juan Sanchez, 2019. "Aggregate Implications of Household Financial Distress," 2019 Meeting Papers 1308, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1308
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