Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession
91 Pages Posted: 26 Mar 2019
Date Written: March 2019
This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.
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