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The Effects of Macroeconomic Shocks: Household Financial Distress Matters


Abstract: When a macroeconomic shock arrives, variation in household balance-sheet health (captured by the presence of financial distress "FD"), leads to differential access to credit, and hence a distribution of consumption responses. As we document, though, over the past two recessions, households in prior FD also experienced macroeconomic shocks more intensely than others, leading to a distribution of shock severity. Thus, quantifying the importance of both dimensions of heterogeneity (FD or shock-severity) for consumption requires a structural model. We find that heterogeneity in FD matters more than dispersion in shock-severity for shaping the responses of individual and aggregate consumption to any shock.

Keywords: consumption; credit card debt; recession; bankruptcy; foreclosure; mortgage; delinquency; financial distress;

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

https://doi.org/10.20955/wp.2019.025

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2022-09-14

Number: 2019-025

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