The Effects of Macroeconomic Shocks: Household Financial Distress Matters
83 Pages Posted: 16 Nov 2020 Last revised: 9 Jan 2024
Date Written: January 04, 2024
Abstract
When a macroeconomic shock arrives, variation in household balance sheet health (captured by the presence of financial distress, or “FD”), leads to differential access to credit, and hence a distribution of consumption responses. As we document, though, over the past two recessions, households in prior FD also experienced macroeconomic shocks more intensely than others, leading to a distribution of shock severity. Quantifying the importance of each dimension of heterogeneity (FD or shock severity) for consumption requires a structural model. We find that heterogeneity in FD matters more than dispersion in shock severity for shaping the responses of individual and aggregate consumption to any shock.
Keywords: Consumption, Credit Card Debt, Recession, Bankruptcy, Foreclosure, Mortgage, Delinquency, Financial Distress, Inequality, Poverty
JEL Classification: D31, D58, E21, E44, G11, G12, G21
Suggested Citation: Suggested Citation