Household Financial Distress and the Burden of “Aggregate” Shocks

October 5, 2020
By Kartik Athreya, Ryan Mather, José Mustre-del-Río and Juan M. Sánchez


Research Working PaperAccounting for household financial distress helps explain large regional differences in spending responses during recessions.

In this paper we show that household-level financial distress (FD) varies greatly and can increase vulnerability to economic shocks. To do this, we establish three facts: (i) regions in the United States vary significantly in their “FD-intensity,” measured either by how much additional credit households can access or how delinquent they are on debts, (ii) shocks that are typically viewed as “aggregate” in nature hit geographic areas quite differently, and (iii) FD is an economic “pre-existing condition”: the share of an aggregate shock borne by a region is positively correlated with the level of FD present at the time of the shock. Using an empirically disciplined and institutionally rich model of consumer debt and default, we show that in the shocks dealt by the Great Recession and the initial months of the COVID-19 pandemic, FD had quantitative significance for consumption. Our model suggests that the uneven distribution of FD creates widely varying consumption responses to shocks. This is true even when subjecting regions with differing levels of FD to the same shocks.

Download paper

RWP 20-13, September 2020

JEL Classification: D31, D58, E21, E44, G11, G12, G21

Article Citation

  • Athreya, Kartik, Ryan Mather, José Mustre-del-Río, and Juan M. Sánchez. 2020. “Household Financial Distress and the Burden of ‘Aggregate’ Shocks.” Federal Reserve Bank of Kansas City, Research Working Paper no. 20-13, September. Available at https://doi.org/10.18651/RWP2020-13

Related Research

  • Athreya, Kartik, Ryan A. Mather, José Mustre-del-Río, and Juan M. Sánchez. 2019. “Consumption in the Great Recession: The Financial Distress Channel.” Federal Reserve Bank of Kansas City, Research Working Paper no. 19-06, October. Available at https://doi.org/10.18651/RWP2019-06
  • Athreya, Kartik, José Mustre-del-Río, and Juan M. Sánchez. 2019. “The Persistence of Financial Distress.” Review of Financial Studies, vol. 32, no. 10, pp. 3851–3883. Available at https://doi.org/10.1093/rfs/hhz009
  • Mian, Atif, Kamalesh Rao, and Amir Sufi. 2013. “Household Balance Sheets, Consumption, and the Economic Slump.” Quarterly Journal of Economics, vol. 128, no. 4, pp. 1687–1726. Available at https://doi.org/10.1093/qje/qjt020