Who Bears the Cost of Recessions? The Role of House Prices and Household Debt
This chapter reviews empirical estimates of differential income and consumption growth across individuals during recessions. Most existing studies examine the variation in income and consumption growth across individuals by sorting on ex ante or contemporaneous income or consumption levels. We build on this literature by showing that differential shocks to household net worth coming from elevated household debt and the collapse in house prices play an underappreciated role. Using zip codes in the United States as the unit of analysis, we show that the decline in numerous measures of consumption during the Great Recession was much larger in zip codes that experienced a sharp decline in housing net worth. In the years prior to the recession, these same zip codes saw high house price growth, a substantial expansion of debt by homeowners, and high consumption growth. We discuss what models seem most consistent with this striking pattern in the data, and we highlight the increasing body of macroeconomic evidence on the link between household debt and business cycles. Our main conclusion is that housing and household debt should play a larger role in models exploring the importance of household heterogeneity on macroeconomic outcomes and policies.
This manuscript is prepared as a chapter for the Handbook of Macroeconomics: Volume 2. The research presented here was supported by funding from the Initiative on Global Markets at Chicago Booth, the Fama-Miller Center at Chicago Booth, and Princeton University. We thank Ruediger Bachmann, John B. Taylor, Harald Uhlig, and seminar participants at the Handbook of Macroeconomics conference at the University of Chicago for valuable feedback. We thank Jung Sakong and Xiao Zhang for excellent research assistance. Any opinions, findings, or conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the view of any other institution. Mian: (609) 258 6718, firstname.lastname@example.org; Sufi: (773) 702 6148, email@example.com The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.