Consumer Debt Dynamics: Follow the Increasers

48 Pages Posted: 22 Mar 2014

See all articles by J. Carter Braxton

J. Carter Braxton

University of Wisconsin - Madison - Univeristy of Wisconsin-Madison

Edward S. Knotek

Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: March 20, 2014

Abstract

Consumer debt played a central role in creating the U.S. housing bubble, the ensuing housing downturn, and the Great Recession, and it has been blamed as a factor in the weak subsequent recovery as well. This paper uses micro-level data to decompose consumer debt dynamics by separating the actions of consumer debt increasers and decreasers, and then further decomposing movements into percentage and size margins among the increasers and decreasers. We view such a decomposition as informative for macroeconomic models featuring a central role for consumer debt. Using this framework, we show that variations in borrowing activity among the increasers explain four times as much of the total variation in consumer debt as variations among the decreasers who are shedding debt, whether through paydowns or defaults. We also provide micro-level evidence of a sharp decline in the percentage of increasers during the financial crisis that is qualitatively consistent with a binding zero lower bound on nominal interest rates, and evidence of a cycle in the average size of debt changes among the increasers that is related to rising collateral values pre-crisis coupled with additional financial frictions after the crisis.

Keywords: consumer debt, deleveraging, zero lower bound, increasers, decreasers

JEL Classification: E32, E21, D14

Suggested Citation

Braxton, John and Knotek, Edward S., Consumer Debt Dynamics: Follow the Increasers (March 20, 2014). FRB of Cleveland Working Paper No. 14-01, Available at SSRN: https://ssrn.com/abstract=2412188

John Braxton

University of Wisconsin - Madison - Univeristy of Wisconsin-Madison ( email )

1300 Linden Dr
Madison, WI 53706
United States

Edward S. Knotek (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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