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Debt and the Consumption Response to Household Income Shocks (2013)
| Citations: | 17 - 0 self |
BibTeX
@MISC{Baker13debtand,
author = {Scott R. Baker and Itay Saporta and Andrey Fradkin and Pete Troyan and Siddharth Kothari},
title = {Debt and the Consumption Response to Household Income Shocks},
year = {2013}
}
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Abstract
This paper exploits a detailed new dataset with comprehensive monthly financial information on millions of households to investigate the interaction between household balance sheets, income, and consumption during the Great Recession. In particular, I test whether consumption among households with higher levels of debt is more sensitive to a given change in income. I match households to their employers and use employer shocks to derive persistent and unanticipated changes in household income. I find that highly-indebted households are more sensitive to income fluctuations and that a one standard deviation increase in debt-to-asset ratios increases the elasticity of consumption by approximately 20%. I employ household savings and credit availability data to show that these results are driven largely by borrowing and liquidity constraints. These estimates suggest that the drop in consumption during the 2007-2009 recession was approximately 25 % greater than what would have been seen with the household balance sheet positions in 1983.
Keyphrases
household income shock consumption response household income credit availability data employer shock highly-indebted household comprehensive monthly financial information household saving household balance sheet debt-to-asset ratio great recession detailed new dataset standard deviation increase household balance sheet position unanticipated change 2007-2009 recession income fluctuation liquidity constraint
