Household Leverage Cycle Around the Great Recession

TL;DR

This study provides causal evidence that credit supply expansion, especially through private-label mortgages driven by net export growth, significantly contributed to the household leverage cycle and the associated local economic fluctuations during 1999-2010.

Contribution

It is the first to establish a causal link between credit supply expansion and household leverage cycles, emphasizing the role of private-label mortgages and net export growth.

Findings

Credit expansion caused stronger household leverage cycles in high net-export-growth areas.

Household leverage cycles amplified local economic fluctuations, including housing prices and construction.

Evidence against the corporate channel as the main driver of the business cycle.

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).