Essays on Household Credit Markets and Business Cycles

Abstract

What is the role of household credit markets in the business cycle? Do credit market conditions and household debt positions amplify fluctuations in employment and output, or are they passive reflections of the state of the real economy? Should public policy intervene in credit markets when household leverage grows rapidly, or are credit market outcomes efficient from a macroeconomic perspective? This collection of essays empirically investigates the interplay between household credit markets and the real economy.

Chapter 1, co-authored with Gyozo Gyongyosi, examines the household debt-deflation channel of recessions. The chapter isolates the effect of a sudden increase in real household debt burdens by exploiting variation across individuals and regions in exposure to foreign currency debt during the Hungarian currency crisis of 2008. The sudden revaluation of household debt burdens caused by the exchange rate depreciation translates into an increase in default rates, a collapse in consumption, and a significantly worse local recession. The chapter presents evidence of negative spillover effects on local firms and households that did not borrow in foreign currency, consistent with negative financial externalities of debt financing.

Chapter 2, co-authored with Atif Mian and Amir Sufi, analyzes the consequences of household credit expansions using panel data for 30 mostly advanced economies over the past 40 years. Expansions in household credit are associated with a boom and subsequent reversal in output. The chapter argues that credit supply shocks play an important role in instigating increases in credit, while macroeconomic frictions translate debt-induced declines in spending into declines in output.

Chapter 3, co-authored with Atif Mian and Amir Sufi, investigates how credit supply expansions affect the real economy. The chapter develops a new methodology for distinguishing whether credit expansions operate by increasing production capacity or by boosting aggregate demand. The chapter then explores these channels in the context of two natural experiments for credit supply expansion: banking deregulation in the United States during the 1980s and the introduction of the euro in the 2000s. Evidence from these episodes suggests that credit expansions tend to influence real activity primarily by raising aggregate demand.