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Title: Household Leverage and the Great Recession in Europe
Authors: Ligthart, Nick
Advisors: Itskhoki, Oleg
Department: Woodrow Wilson School
Class Year: 2014
Abstract: This paper examines whether the increase in household leverage witnessed across Europe from 2002 to 2007 can help explain the cross-sectional severity of the Great Recession from 2007 to 2010. It contributes to the literature by conducting a rigorous analysis that focuses on the Great Recession in Europe specifically, and controlling for factors that are not picked up by the scatter plots and graphs used in other papers. The results indicate that the increase in household leverage from 2002 to 2007 is a good predictor of the decrease in new personal vehicle registrations, residential investment, and durable consumption from 2007 to 2010, as well as to a lesser degree of the increase in unemployment over that same period. The empirical analysis moreover points to the importance of a residential construction channel in explaining particularly the increase in unemployment from 2007 to 2010. Finally, the paper emphasizes the inevitability of household deleveraging, and discusses policy options for dampening the negative impact this might have on the economy.
Extent: 92 pages
Type of Material: Princeton University Senior Theses
Language: en_US
Appears in Collections:Woodrow Wilson School, 1929-2016

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