Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/154276 
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper No. 1843
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
Using a novel dataset for the US states, this paper examines whether household debt and the protracted debt deleveraging help explain the dismal performance of US consumption since 2007 in the aftermath of the housing bubble. By separating the concepts of deleveraging and debt overhang - a flow and a stock effect - we find that excessive indebtedness exerted a meaningful drag on consumption over and beyond income and wealth effects. The overall impact, however, is modest - around one-sixth of the slowdown in consumption between 2000-06 and 2007-12 - and mostly driven by states with particularly large imbalances in their household sector. This might be indicative of non-linearities, whereby indebtedness begins to bite only when misalignments from sustainable debt dynamics become excessive.
Subjects: 
Consumption function
Debt overhang
Household deleveraging
Housing wealth
JEL: 
C13
C23
C52
D12
H31
ISBN: 
978-92-899-1656-1
Document Type: 
Working Paper

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