Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession / Peter Ganong, Pascal Noel.

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Ganong, Peter

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w24964.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w24964 (Browse shelf(Opens below))	Not For Loan

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August 2018.

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.