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

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Listed:
  • Adrien Auclert

    (Stanford University)

  • Paul Goldsmith-Pinkham

    (Yale University)

  • Will Dobbie

    (Princeton University)

Abstract

This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize the level of employment during the Great Recession. We begin by documenting that states with more and less generous bankruptcy exemptions had statistically identical employment outcomes during the 2001-2007 period. Starting in 2008, however, states with more generous bankruptcy exemptions had significantly smaller declines in local non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these responses as the causal effect of the debt relief provided by the consumer bankruptcy system on employment across states, and develop a general equilibrium model to recover the aggregate effect of this debt relief. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form cross-state estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers from more generous to less generous 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 & Paul Goldsmith-Pinkham & Will Dobbie, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," 2019 Meeting Papers 355, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:355
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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. Chodorow-Reich, Gabriel, 2020. "Regional data in macroeconomics: Some advice for practitioners," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    3. 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.
    4. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    5. 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.
    6. 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.
    7. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).

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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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