Credit-driven household demand channel

Atif Mian and Amir Sufi

Princeton University and University of Chicago

January 26, 2018

1 / 13

An enduring footprint of the Great Recession

AL

AK

AZ

AR

CA

COCT DE

DC

FLGA

HI

ID

ILIN

IAKS

KYLA

MEMD

MAMI

MN

MSMO

MT

NE

NV

NH

NJ

NMNY

NC

ND

OH

OK

OR

PA

RISC

SD

TNTX

UT

VT

VA

WAWV

WIWY

0

2

4

6

8

10

Cha

nge

Une

mpl

oym

ent R

ate,

200

7 to

201

0

0 10 20 30 40 50 60Change HH debt to GDP Ratio, 2002 to 2007

United States

AUSAUT

BELCAN

CHECZE

DEU

DNK

ESP

FINFRA GBR

GRC

HKG

HUN

IDN

IRL

ITAJPN

KORMEX

NLDNORPOL

PRT

SGP

SWE

THA

TUR

USA

−5

0

5

10

15

Cha

nge

Une

mpl

oym

ent R

ate,

200

7 to

201

0

−20 0 20 40 60Change HH debt to GDP Ratio, 2002 to 2007

World

2 / 13

An enduring footprint of the Great Recession

AL

AK

AZ

AR

CA

COCT DE

DC

FLGA

HI

ID

ILIN

IAKS

KYLA

MEMD

MAMI

MN

MSMO

MT

NE

NV

NH

NJ

NMNY

NC

ND

OH

OK

OR

PA

RISC

SD

TNTX

UT

VT

VA

WAWV

WIWY

0

2

4

6

8

10

Cha

nge

Une

mpl

oym

ent R

ate,

200

7 to

201

0

0 10 20 30 40 50 60Change HH debt to GDP Ratio, 2002 to 2007

United States

AUSAUT

BELCAN

CHECZE

DEU

DNK

ESP

FINFRA GBR

GRC

HKG

HUN

IDN

IRL

ITAJPN

KORMEX

NLDNORPOL

PRT

SGP

SWE

THA

TUR

USA

−5

0

5

10

15

Cha

nge

Une

mpl

oym

ent R

ate,

200

7 to

201

0

−20 0 20 40 60Change HH debt to GDP Ratio, 2002 to 2007

World

2 / 13

An enduring footprint of the Great Recession

AL

AK

AZ

AR

CA

COCT DE

DC

FLGA

HI

ID

ILIN

IAKS

KYLA

MEMD

MAMI

MN

MSMO

MT

NE

NV

NH

NJ

NMNY

NC

ND

OH

OK

OR

PA

RISC

SD

TNTX

UT

VT

VA

WAWV

WIWY

0

2

4

6

8

10

Cha

nge

Une

mpl

oym

ent R

ate,

200

7 to

201

0

0 10 20 30 40 50 60Change HH debt to GDP Ratio, 2002 to 2007

United States

AUSAUT

BELCAN

CHECZE

DEU

DNK

ESP

FINFRA GBR

GRC

HKG

HUN

IDN

IRL

ITAJPN

KORMEX

NLDNORPOL

PRT

SGP

SWE

THA

TUR

USA

−5

0

5

10

15

Cha

nge

Une

mpl

oym

ent R

ate,

200

7 to

201

0

−20 0 20 40 60Change HH debt to GDP Ratio, 2002 to 2007

World

2 / 13

The footprint was always there ... with an asymmetry

3 / 13

The footprint was always there ... with an asymmetry

3 / 13

The footprint was always there ... with an asymmetry

3 / 13

Two possible channels for credit pass-through to real economy

4 / 13

The 1980’s natural experiment

Shift in credit supply ...

100

150

200

250

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Total Bank Credit

5 / 13

The 1980’s natural experiment

Shift in credit supply ...

100

150

200

250

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Total Bank Credit

5 / 13

1. ... boom-bust cycle

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Unemployment Rate

100

120

140

160

180

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

House Price

6 / 13

1. ... boom-bust cycle

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Unemployment Rate

100

120

140

160

180

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

House Price

6 / 13

1. ... boom-bust cycle

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Unemployment Rate

100

120

140

160

180

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

House Price

6 / 13

2. The household demand channel

7 / 13

2. The household demand channel

100

110

120

130

140

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Non−tradable

80

100

120

140

160

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Construction

8 / 13

2. The household demand channel

100

110

120

130

140

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Non−tradable

80

100

120

140

160

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Construction

8 / 13

2. The household demand channel

100

110

120

130

140

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Non−tradable

80

100

120

140

160

1980 1982 1984 1986 1988 1990 1992

Early Deregulation States Late Deregulation States

Construction

8 / 13

3. Adjustment difficulties on the downside

0

2

4

6

Per

cent

age

Poi

nts

1980 1982 1984 1986 1988 1990 1992

Early minus Late Deregulation States

CPI

0

2

4

6

8

10

Per

cent

age

Poi

nts

1980 1982 1984 1986 1988 1990 1992

Early minus Late Deregulation States

Wages

9 / 13

3. Adjustment difficulties on the downside

0

2

4

6

Per

cent

age

Poi

nts

1980 1982 1984 1986 1988 1990 1992

Early minus Late Deregulation States

CPI

0

2

4

6

8

10

Per

cent

age

Poi

nts

1980 1982 1984 1986 1988 1990 1992

Early minus Late Deregulation States

Wages

9 / 13

3. Adjustment difficulties on the downside

0

2

4

6

Per

cent

age

Poi

nts

1980 1982 1984 1986 1988 1990 1992

Early minus Late Deregulation States

CPI

0

2

4

6

8

10

Per

cent

age

Poi

nts

1980 1982 1984 1986 1988 1990 1992

Early minus Late Deregulation States

Wages

9 / 13

Household leverage and the recession of 1990 to 1991

10 / 13

Where does it all mean?

11 / 13

Where does credit expansion come from?

• Longer term forces

• Secular growth in private credit, especially household credit, since 1980 (Jorda et al)

• Decline in long-term real rate globally.

• “financial excesses”, e.g. increasing inequality and savings glut.

• Longer term forces interact with ...

• behavioral biases and aggregate demand externality

• financial deregulation, liberalization and innovation.

12 / 13

Where does credit expansion come from?

• Longer term forces

• Secular growth in private credit, especially household credit, since 1980 (Jorda et al)

• Decline in long-term real rate globally.

• “financial excesses”, e.g. increasing inequality and savings glut.

• Longer term forces interact with ...

• behavioral biases and aggregate demand externality

• financial deregulation, liberalization and innovation.

12 / 13

Policy Implications Of The Credit-Driven Household Demand Channel

• macro prudential policies for household credit

• better risk-sharing inside the financial architecture

• monetary policy effectiveness dependant on demand pass-through

• low interest rate and productivity?

• addressing the structural imbalances, such as financial excesses.

13 / 13