Household Leverage Cycle Around the Great Recession

Bo Li

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arXiv · 2407.01539

Household Leverage Cycle Around the Great Recession

Bo Li

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Abstract

This paper provides the first causal evidence that credit supply expansion caused the 1999-2010 U.S. business cycle mainly through the channel of household leverage (debt-to-income ratio). Specifically, induced by net export growth, credit expansion in private-label mortgages, rather than government-sponsored enterprise mortgages, causes a much stronger boom and bust cycle in household leverage in the high net-export-growth areas. In addition, such a stronger household leverage cycle creates a stronger boom and bust cycle in the local economy, including housing prices, residential construction investment, and house-related employment. Thus, our results are consistent with the credit-driven household demand channel (Mian and Sufi, 2018). Further, we show multiple pieces of evidence against the corporate channel, which is emphasized by other business cycle theories (hypotheses).

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Bo Li. 2024-03-15. Household Leverage Cycle Around the Great Recession. https://arxiv.org/abs/2407.01539

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