Working Paper: NBER ID: w24746
Authors: Mark Gertler; Simon Gilchrist
Abstract: Since the onset of the Great Recession, an explosion of both theoretical and empirical research has investigated how the financial crisis emerged and how it was transmitted to the real sector. The goal of this paper is to describe what we have learned from this new research and how it can be used to understand what happened during the Great Recession. In the process, we also present some new evidence on the role of the household balance sheet channel versus the disruption of banking. We examine a panel of quarterly state level data on house prices, mortgage debt and employment along with a measure of banking distress. Then exploiting both panel data and time series methods, we analyze the contribution of the house price decline versus the banking distress indicator to the overall decline in employment during the Great Recession. We confirm a common finding in the literature that the household balance sheet channel is important for regional variation in employment. However, we also find that the disruption in banking was central to the overall employment contraction
Keywords: Great Recession; financial factors; household balance sheet; banking disruption; employment
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in house prices (R31) | Deterioration in household balance sheets (G59) |
| Deterioration in household balance sheets (G59) | Reduced access to credit (G21) |
| Reduced access to credit (G21) | Diminished consumer spending (D12) |
| Decline in house prices (R31) | Decrease in aggregate employment (J63) |
| 1% increase in financial excess bond premium (G12) | 3.6% drop in employment (J63) |
| Financial conditions (E66) | Employment (J68) |
| Current house prices (R31) | Employment (J68) |
| Household leverage (G51) | Employment outcomes (J68) |