"Household Balance Sheets, Consumption, and the Economic Slump"

by Atif Mian, Kamalesh Rao, and Amir Sufi

Quarterly Journal of Economics, 2013, 1687-1726.

We investigate the consumption consequences of the 2006–9 housing collapse using the highly unequal geographic distribution of wealth losses across the United States. We estimate a large elasticity of consumption with respect to housing net worth of 0.6 to 0.8, which soundly rejects the hypothesis of full consumption risk-sharing. The average marginal propensity to consume (MPC) out of housing wealth is 5–7 cents with substantial heterogeneity across ZIP codes. ZIP codes with poorer and more levered households have a significantly higher MPC out of housing wealth. In line with the MPC result, ZIP codes experiencing larger wealth losses, particularly those with poorer and more levered households, experience a larger reduction in credit limits, refinancing likelihood, and credit scores. Our findings highlight the role of debt and the geographic distribution of wealth shocks in explaining the large and unequal decline in consumption from 2006 to 2009.

Published paper
Online appendix
Working paper version
County-level data on debt-to-income ratios (Federal Reserve Bank of New York and IRS)
CBSA-level data on housing net worth shocks

"Non-durable Consumption and Housing Net Worth in the Great Recession:
Evidence from Easily Accessible Data"

by Greg Kaplan, Kurt Mitman, and Giovanni L. Violante

Revise and Resubmit, Journal of Public Economics

In an influential paper, Mian, Rao, and Sufi (2013) exploit geographic variation in housing supply elasticities to measure the effect of the fall in housing net worth on household expenditures during the Great Recession. Their widely-cited estimates are based on proprietary house price and expenditure data. We revisit their study using alternative more easily accessible data on house prices and spending on a subset of non-durable goods. We re-affirm their findings in our data, and refine their analysis in several dimensions: (i) we provide a micro-foundation for their empirical specification as measuring a wealth effect in response to a change in house prices; (ii) we suggest a test for this interpretation by distinguishing the roles of lower house prices and initial leverage; (iii) we separate the impact of the shock on quantity consumed from that on prices; (iv) using the Consumer Expenditure Survey, we infer the implied elasticity of total non-durable expenditures in goods and services to housing net worth; and (v) we show how the elasticity is affected by controlling for contemporaneous changes in labor market conditions.

Working paper version