Household leverage and the recession
By: Thomas Philippon, Virgiliu Midrigan
Contributors: Midrigan, Virgiliu; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16965; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16965.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "A salient feature of the recent U.S.  recession is that output and employment have declined more in regions (states, counties) where household leverage had increased more during the credit boom.  This pattern is difficult to explain with standard models of financing frictions.  We propose a theory that can account for these cross-sectional facts.  We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions.  A decline in home equity borrowing tightens the cash-in-advance constraint, thus triggering a recession.  We show that the evidence on house prices, leverage and employment across US regions identifies the key parameters of the model.  Models estimated with cross-sectional evidence display high sensitivity of real activity to nominal credit shocks.  Since home equity borrowing and public money are, in the model, perfect substitutes, our counter-factual experiments suggest that monetary policy actions have significantly reduced the severity of the recent recession"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/23/2011.

Includes bibliographical references.

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