Consumption in the Great Recession: The Financial Distress Channel

Athreya, Kartik B.; Mather, Ryan; Mustre-del-Rio, Jose; Sanchez, Juan M.

doi:10.18651/RWP2019-06

Working Paper

Consumption in the Great Recession: The Financial Distress Channel

Abstract: During the Great Recession, the collapse of consumption across the U.S. varied greatly but systematically with house-price declines. We find that financial distress among U.S. households amplified the sensitivity of consumption to house-price shocks. We uncover two essential facts: (1) the decline in house prices led to an increase in household financial distress prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of financial distress prior to the recession was positively correlated with house-price declines at the onset of the recession. Using a rich-estimated-dynamic model to measure the financial distress channel, we find that these two facts amplify the aggregate drop in consumption by 7 percent and 45 percent respectively.

Keywords: Consumption; Credit Card; Mortgage; Bankruptcy; Foreclosure; Delinquency; Financial Distress; Great Recession;

JEL Classification: D31; D58; E21; E44; G11; G12; G21;

https://doi.org/10.18651/RWP2019-06