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Tuesday, September 06, 2011

NBER Research Summary: The Role of Household Leverage

This NBER Research Summary by Atif Mian and Amir Sufi echoes many of the arguments I've been making about balance sheet recessions. In addition, the authors argue that the trouble in mortgage markets can be traced to a "securitization-driven shift in the supply of mortgage credit," and that "the expansion in mortgage credit was more likely to be a driver of house price growth than a response to it." They also show that "non-GSE securitization primarily targeted zip codes that had a large share of subprime borrowers. In these zip codes, mortgage denial rates dropped dramatically and debt-to-income ratios skyrocketed":

Finance and Macroeconomics: The Role of Household Leverage, by Atif R. Mian and Amir Sufi, NBER Reporter 2011 Number 3, Research Summary: The increase in household leverage prior to the most recent recession was stunning by any historical comparison. From 2001 to 2007, household debt doubled, from $7 trillion to $14 trillion. The household debt-to-income ratio increased by more during these six years than it had in the prior 45 years. In fact, the household debt-to-income ratio in 2007 was higher than at any point since 1929. Our research agenda explores the causes and consequences of this tremendous rise in household debt. Why did U.S. households borrow so much and in such a short span of time? What factors triggered the slowdown and collapse of the real economy? Did household leverage amplify macroeconomic shocks and make a quick recovery less likely? How do politics constrain policy responses to an economic crisis?

While the focus of our research is on the recent U.S. economic downturn, we believe the implications of our work are wider. For example, both the Great Depression and Japan's Great Recession were preceded by sharp increases in leverage.1 We believe that understanding the impact of household debt on the economy is crucial to developing a better understanding of the linkages between finance and macroeconomics. ...[continue reading]...

    Posted by on Tuesday, September 6, 2011 at 03:42 PM in Academic Papers, Economics | Permalink  Comments (55)


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