Working Paper Revision
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. Quantifying the importance of each dimension 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; inequality; poverty;
JEL Classification: D31; D58; E21; E44; G11; G12; G21;
https://doi.org/10.20955/wp.2019.025
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2023-09-11
Number: 2019-025
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