The Effects of Macroeconomic Shocks: Household Financial Distress Matters

83 Pages Posted: 16 Nov 2020 Last revised: 9 Jan 2024

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Ryan Mather

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Jose Mustre-del-Rio

Federal Reserve Bank of Kansas City

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis; Federal Reserve Banks - Federal Reserve Bank of St. Louis

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

Athreya, Kartik and Mather, Ryan and Mustre-del-Rio, Jose and Sanchez, Juan M. and Sanchez, Juan M., The Effects of Macroeconomic Shocks: Household Financial Distress Matters (January 04, 2024). Federal Reserve Bank of Kansas City Working Paper No. 20-13, Available at SSRN: https://ssrn.com/abstract=3705675 or http://dx.doi.org/10.2139/ssrn.3705675

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Ryan Mather

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jose Mustre-del-Rio

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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