RWP 19-06, October 2019
During the Great Recession, the collapse of consumption across the U.S. varied greatly but systematically with house-price declines. We find that financial distress among U.S. households amplified the sensitivity of consumption to house-price shocks. We uncover two essential facts: (1) the decline in house prices led to an increase in household financial distress prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of financial distress prior to the recession was positively correlated with house-price declines at the onset of the recession. Using a rich-estimated-dynamic model to measure the financial distress channel, we find that these two facts amplify the aggregate drop in consumption by 7 percent and 45 percent respectively.
JEL Classification: D31, D58, E21, E44, G11, G12, G21
Athreya, Kartik, Ryan 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, July. Available at External Linkhttps://doi.org/10.18651/RWP2019-06