Working Paper
Consumption in the Great Recession: The Financial Distress Channel
Abstract: During the Great Recession, the collapse of consumption across the US varied greatly but systematically with house-price declines. Our message is that household financial health matters for understanding this relationship. Two facts are essential for our finding: (1) the decline in house prices led to an increase in household financial distress (FD) prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of FD prior to the recession was positively correlated with house-price declines at the onset of the recession. We measure the power of the financial distress channel using a rich-estimated-dynamic model of FD. We find that these channels amplify the aggregate drop in consumption by 7% and 45%, respectively.
Keywords: Consumption; Credit Card; Mortgage; Bankruptcy; Fore- closure; Delinquency; Financial Distress; Great Recession;
JEL Classification: D31; D58; E21; E44; G11; G12; G21;
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https://www.richmondfed.org/-/media/richmondfedorg/publications/research/working_papers/2019/wp19-13.pdf
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Bibliographic Information
Provider: Federal Reserve Bank of Richmond
Part of Series: Working Paper
Publication Date: 2019-08-29
Number: 19-13
Pages: 64 pages