Two New Working Papers from JRCPPF Director Atif Mian
Read up on Atif Mian's latest research as published in two recent working papers.
This month, Mian's work (with coauthor Amir Sufi), "Who Bears the Cost of Recessions? The Role of House Prices and Household Debt," was released by NBER.
According to the authors, they reviewed "empirical estimates of differential income and consumption growth across individuals during recessions. Most existing studies examine the variation in income and consumption growth across individuals by sorting on ex ante or contemporaneous income or consumption levels. We build on this literature by showing that differential shocks to household net worth coming from elevated household debt and the collapse in house prices play an underappreciated role. Using zip codes in the United States as the unit of analysis, we show that the decline in numerous measures of consumption during the Great Recession was much larger in zip codes that experienced a sharp decline in housing net worth. In the years prior to the recession, these same zip codes saw high house price growth, a substantial expansion of debt by homeowners, and high consumption growth. We discuss what models seem most consistent with this striking pattern in the data, and we highlight the increasing body of macroeconomic evidence on the link between household debt and business cycles. Our main conclusion is that housing and household debt should play a larger role in models exploring the importance of household heterogeneity on macroeconomic outcomes and policies."
In January, SSRN released another of Mian's papers (this time with coauthors Amir Sufi and Emil Verner), "Household Debt and Business Cycles Worldwide."
In abstract: "A rise in the household debt to GDP ratio predicts lower output growth and a higher unemployment rate over the medium-run, contrary to standard open economy macroeconomic models in which an increase in debt is driven by news of better future income prospects. GDP forecasts by the IMF and OECD underestimate the importance of a rise in household debt to GDP, giving the change in the household debt to GDP ratio of a country the ability to predict growth forecasting errors. The predictive power of a rise in household debt to GDP ratios is significantly stronger in countries with a fixed exchange rate and countries with a floating exchange rate but against the zero lower bound on nominal interest rates. A rise in household debt to GDP is associated contemporaneously with a rising consumption share of output, a worsening of the current account balance, and a rise in the share of consumption goods within imports. Taken together, these results are consistent with demand externality models where credit supply shocks result in households borrowing more than is socially optimal given the presence of nominal rigidities and monetary policy constraints. We also document a global household debt cycle with an increase in household debt to GDP at the global level predicting lower global output growth."