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/10.20955/wp.2019.025

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2019-09-17

Number: 2019-25