Household debt and the Great Recession: Fisher's debt and deflation theory and how we should view the household debt burden
Abstract
This paper compares household debt conditions in the United States before and after the Great Recession of 2007 - 2009. I use a combination of data from the World Bank Development Indicators and the Bank for International Settlements to estimate a model using the Synthetic Control Method for Stata, which creates a depiction of what household debt in the U.S. would have looked like without the impacts of the Great Recession. As a reference point for countries that could be used to compile the weighted synthetic control group, I study the economic characteristics of Australia, Canada, France and Germany because these countries performed well under recessionary pressure. However, upon running the model, I find that the best fit for the data set uses Belgium, Netherlands, Canada, Korea, Portugal, Germany and Denmark. The estimated model is best interpreted through a graph of the household debt service ratio in actual U.S. data and for the synthetic control group changing over time. It shows a clear rapid deleveraging trend for households over the course of the Great Recession, contrasting with a household debt service ratio that remains relatively high for the control group through the recovery period. I then discuss possible implications of my findings, including how the model's similarities to Fisher's household debt theory suggest its relevance in explaining household debt behavior and how it suggests we should view the household debt burden.