Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession

54 Pages Posted: 17 Sep 2018 Last revised: 19 Mar 2021

See all articles by Peter Ganong

Peter Ganong

University of Chicago; National Bureau of Economic Research (NBER)

Pascal Noel

University of Chicago Booth School of Business

Date Written: August 2018

Abstract

We use variation in mortgage modifications to disentangle the impact of reducing long-term obligations with no change in short-term payments (“wealth”), and reducing short-term payments with approximately no change in long-term obligations (“liquidity”). Using regression discontinuity and difference-in-differences research designs with administrative data measuring default and consumption, we find that principal reductions that increase housing wealth without affecting liquidity have no effect, while maturity extensions that increase only liquidity have large effects. Our results suggest that liquidity drives borrower default and consumption decisions, and that distressed debt restructurings can be redesigned with substantial gains to borrowers, lenders, and taxpayers.

Suggested Citation

Ganong, Peter and Noel, Pascal, Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession (August 2018). NBER Working Paper No. w24964, Available at SSRN: https://ssrn.com/abstract=3244247

Peter Ganong (Contact Author)

University of Chicago ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pascal Noel

University of Chicago Booth School of Business ( email )

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