PDFDownload paper RWP 20-13, September 2020

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.

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

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 External Linkhttps://doi.org/10.18651/RWP2020-13


José Mustre-del-Río

Research and Policy Officer

José Mustre-del-Río is a Research and Policy Officer at the Federal Reserve Bank of Kansas City. He joined the Economic Research Department in August 2011. Prior to joining the d…