Household Leverage and the Recession

Callum Jones, Virgiliu Midrigan, Thomas Philippon

NBER Working Paper No. 16965
Issued in April 2011, Revised in June 2018
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics

We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40% of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w16965