Who Bears the Cost of Recessions? The Role of House Prices and Household Debt

A. Mian, A. Sufi

Research output: Chapter in Book/Report/Conference proceedingChapter

8 Scopus citations

Abstract

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.

Original languageEnglish (US)
Title of host publicationHandbook of Macroeconomics, 2016
EditorsJohn B. Taylor, Harald Uhlig
PublisherElsevier B.V.
Pages255-296
Number of pages42
ISBN (Print)9780444594877
DOIs
StatePublished - Jan 1 2016

Publication series

NameHandbook of Macroeconomics
Volume2
ISSN (Print)1574-0048

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)

Keywords

  • Consumption
  • Distribution
  • Household debt
  • Housing
  • Inequality
  • Recession

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  • Cite this

    Mian, A., & Sufi, A. (2016). Who Bears the Cost of Recessions? The Role of House Prices and Household Debt. In J. B. Taylor, & H. Uhlig (Eds.), Handbook of Macroeconomics, 2016 (pp. 255-296). (Handbook of Macroeconomics; Vol. 2). Elsevier B.V.. https://doi.org/10.1016/bs.hesmac.2016.03.005