NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Household Leverage and the Recession

Thomas Philippon, Virgiliu Midrigan

NBER Working Paper No. 16965
Issued in April 2011
NBER Program(s):   AP   EFG   ME

A salient feature of the recent U.S. recession is that output and employment have declined more in regions (states, counties) where household leverage had increased more during the credit boom. This pattern is difficult to explain with standard models of financing frictions. We propose a theory that can account for these cross-sectional facts. We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions. A decline in home equity borrowing tightens the cash-in-advance constraint, thus triggering a recession. We show that the evidence on house prices, leverage and employment across US regions identifies the key parameters of the model. Models estimated with cross-sectional evidence display high sensitivity of real activity to nominal credit shocks. Since home equity borrowing and public money are, in the model, perfect substitutes, our counter-factual experiments suggest that monetary policy actions have significantly reduced the severity of the recent recession.

download in pdf format
   (329 K)

email paper

This paper is available as PDF (329 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Users who downloaded this paper also downloaded these:
Jones w17094 Life and Growth
Farmer and Plotnikov w16644 Does Fiscal Policy Matter? Blinder and Solow Revisited
Mian and Sufi w17830 What explains high unemployment? The aggregate demand channel
Monacelli, Quadrini, and Trigari w17389 Financial Markets and Unemployment
Guerrieri and Lorenzoni w17583 Credit Crises, Precautionary Savings, and the Liquidity Trap
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us