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

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Peter Ganong
  • Pascal Noel
American Economic Review
vol. 110, no. 10, October 2020
(pp. 3100–3138)
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Abstract

We exploit 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 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 wealth without affecting liquidity have no effect, while maturity extensions that increase only liquidity have large effects. This suggests that liquidity drives default and consumption decisions for borrowers in our sample and that distressed debt restructurings can be redesigned with substantial gains to borrowers, lenders, and taxpayers.

Citation

Ganong, Peter, and Pascal Noel. 2020. "Liquidity versus Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession." American Economic Review, 110 (10): 3100–3138. DOI: 10.1257/aer.20181243

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
  • R38 Production Analysis and Firm Location: Government Policy