Working Paper: NBER ID: w16965
Authors: Callum Jones; Virgiliu Midrigan; Thomas Philippon
Abstract: 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.
Keywords: household leverage; recession; credit shocks; employment; consumption
JEL Codes: E2; E4; E5; G0; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household credit limits (G51) | Employment dynamics (J63) |
| Credit shocks (E51) | Employment decline (aggregate) (E24) |
| Credit shocks (E51) | Employment gap (post-recession) (J63) |
| Credit shocks (E51) | Consumption dynamics (E21) |
| ZLB (E62) | Marginal effect of credit shock (E51) |