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.
Correcting misconceptions about markets, economics, asset prices, derivatives, equities, debt and finance
Saturday, April 30, 2011
Biggest Recessionary Decline In States And Counties With Greatest Past Increases In Household Leverage
Posted By Milton Recht
From "Household Leverage and the Recession" by Thomas Philippon, Stern School of Business, New York University and Virgiliu Midrigan, Department of Economics, New York University:
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