Labor Market Upheaval, Default Regulations, and Consumer Debt

Transcription

1 Labor Market Upheaval, Default Regulations, and Consumer Debt Kartik Athreya Juan M. Sánchez Xuan S. Tam Eric R. Young FRB Richmond FRB St Louis City Univ of Hong Kong University of Virginia December 6, 2013 ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

2 Motivation Motivation Since 2009 Big changes in household leverage ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

3 Motivation Drop in leverage Mean Debt/Mean Income Index Data Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

4 Motivation Motivation Since 2009 Big changes in household leverage Big changes in the level and type of consumer default ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

5 Motivation How You Can Default US offers consumers formal route to repudiate debt: ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

6 Motivation How You Can Default US offers consumers formal route to repudiate debt: Chapter 7: in exchange for assets above threshold, debts are removed ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

7 Motivation How You Can Default US offers consumers formal route to repudiate debt: Chapter 7: in exchange for assets above threshold, debts are removed Also an informal method...just stop paying ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

8 Motivation Change in default DQ Debt Rate DQ Debt(%) BK Rate(%) BK Rate Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

9 Motivation Why? Two relevant things happened just before, and during, this period... ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

10 Motivation Labor Market Upheaval Average Unemployment Duration, Quaters Employment Rate Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

11 Motivation Bankruptcy Reform In late 2005, BAPCPA roughly doubled bankruptcy filing cost Seems to have come as a surprise ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

12 Motivation Our Question What role did bankruptcy reform and labor market changes play in the paths of debt, delinquency, and bankruptcy over the Great Recession? ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

13 Motivation What we do ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

14 Motivation What we do Step 1: Feed in labor market upheaval, by setting ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

15 Motivation What we do Step 1: Feed in labor market upheaval, by setting job separation rates ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

16 Motivation What we do Step 1: Feed in labor market upheaval, by setting job separation rates job finding rates ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

17 Motivation What we do Step 1: Feed in labor market upheaval, by setting job separation rates job finding rates ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

18 Motivation What we do Step 1: Feed in labor market upheaval, by setting job separation rates job finding rates Step 2: Compare model predictions for paths of debt, delinquency, bankruptcy to data ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

19 Motivation What we do Step 1: Feed in labor market upheaval, by setting job separation rates job finding rates Step 2: Compare model predictions for paths of debt, delinquency, bankruptcy to data Step 3: Use counterfactuals to understand the roles of labor markets and bankruptcy law in outcomes Evaluate Step 2 with and without 2005 BK reform Evaluate Step 2 with and without changes in labor markets ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

20 Model Framework Model Framework Life cycle model with uninsurable idiosyncratic earnings risk: ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

21 Model Framework Model Framework Life cycle model with uninsurable idiosyncratic earnings risk: Deterministic education and lifecycle component Persistent component Transitory component Job offers and option to reject (I ll simplify the notation for income process in what follows) ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

22 Model Framework Model Framework Life cycle model with uninsurable idiosyncratic earnings risk: Deterministic education and lifecycle component Persistent component Transitory component Job offers and option to reject (I ll simplify the notation for income process in what follows) Riskless saving with exog. return, risky borrowing with default premium ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

23 Model Framework Model Framework Life cycle model with uninsurable idiosyncratic earnings risk: Deterministic education and lifecycle component Persistent component Transitory component Job offers and option to reject (I ll simplify the notation for income process in what follows) Riskless saving with exog. return, risky borrowing with default premium Two ways to default on debt: ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

24 Model Framework Model Framework Life cycle model with uninsurable idiosyncratic earnings risk: Deterministic education and lifecycle component Persistent component Transitory component Job offers and option to reject (I ll simplify the notation for income process in what follows) Riskless saving with exog. return, risky borrowing with default premium Two ways to default on debt: Bankruptcy: incur filing costs and high utility cost, debts are eliminated ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

25 Model Framework Model Framework Life cycle model with uninsurable idiosyncratic earnings risk: Deterministic education and lifecycle component Persistent component Transitory component Job offers and option to reject (I ll simplify the notation for income process in what follows) Riskless saving with exog. return, risky borrowing with default premium Two ways to default on debt: Bankruptcy: incur filing costs and high utility cost, debts are eliminated Delinquency: incur lower utility cost, debt is reset ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

26 Model Framework Value Function, Solvent vj,e d=0 (b 1, y) = max b {u(c) + β } y π (y y) v j+1,e (b, y ) subject to c + q j,e (b, y)b = b 1 + y ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

27 Model Framework Value Function, DQ v d=1 j,e (y) = u(c) ψ D + β y π (y y) v j+1,e (h j,e (y), y ) subject to c = y key object is h j,e ( ), as explained below ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

28 Model Framework Value Function, BK v d=2 j,e (y) = u(c) ψ B + β y π (y y) v j+1,e (0, y ) subject to c = y (y) (y) will differ by employment status b/c filing costs can be waived ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

29 Model Framework Optimal Behavior of an indebted household { v j,e (b 1, y) = max vj,e d=0 (b 1, y), v d=1 j,e (y), vj,e d=2 } (y) ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

30 Model Framework Delinquency and Debt If faced with a delinquent, optimizing lenders (who lack commitment) solve: h j,e (y) = arg max {bq j,e (b, y)} b Price of face value b of new debt: q j,e (b, y) = Q 1 + r + φ ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

31 Model Framework Pricing and Delinquency A law of motion Q = y π (y y) 1 (d j+1,e (b, y ) = 0) + [ y π (y y) 1 (d j+1,e (b, y ) = 1) q j+1,e(h j+1,e (y ),y )h j+1,e (y ) b ] ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

32 Quantitative Model Earnings Risk Quarterly model key for capturing delinquency Wage risk and employment risk UI, DI, Food stamps Follow Low, Meghir, Pistaferri (2010) Wages and employment both risky, depend on education Workers matched with firms, quality specific to current match m ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

33 Quantitative Model Earnings Risk, con t Wage Risk ln(w j (e, n, m)) = x j (e) + n j + m j n j = n j 1 + ζ j ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

34 Quantitative Model Earnings Risk, con t Employment Risk if employed, offers arrive with Pr. λ E e if unemployed, offers arrive with Pr. λ N e All matches break with exog. separation rate: δ e Disposable Earnings y j (n, m, p) = p(w j (e, n, m)h(1 τ) F e ) p {0, 1} Food Stamps T j (y) A Disability system in place too (like UI, but absorbing) ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

35 Quantitative Model Preferences u(c, p) = (c exp (ϕ ep)) 1 γ 1 γ ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

36 Quantitative Model Parameters Discount factor β Non-pecuniary cost BK ψ B Non-pecuniary cost DQ ψ D Data Model Share of debt in 90+ DQ, % Bankruptcy rate, % Mean (assets/income) ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

37 Results Repayment Decisions Persistent shocks 90 Solvency Bankruptcy Delinquency Current Productivity, n Current Stock of Debt, b ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

38 Results Repayment Decisions Persistent shocks good times for wages means repayment bad times for wages means delinquency get debt forgiveness! medium times for wages and a lot of debt means bankruptcy no forgiveness in DQ. Notice: conditional on shocks no switches in choice of default path Repayment branch value function is only one that depends on debt ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

39 Results On the determination of h(.) and the decision to enter DQ Market Value of h, h*q(h, ) A C h(n_h) B h(n_l) Amount to Repay Next Period, h ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

40 Results Debt and Default in The Great Recession Shocks to job finding and separation Each shock unanticipated, expected to be permanent (can be relaxed) ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

41 Results Model Approximation, shocks Permanent Shocks SS Anticipate BK Reform Shocks 1 Shock 2 Shock 4 New SS Shocks 3 Shocks Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

42 Results The Shocks Job Finding Rate of UN, Left Separation Rate Job Finding Rate Seperation Rate Job Finding Rate of EM, Left Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

43 Results Tracking Employment Rates Employment Rate Data Benchmark Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

44 Results Tracking Unemployment Duration 3.5 Data Average Unemployment Duration Benchmark Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

45 Results Bk Reform Mattered for Observed Bankruptcy Model accounts well for path of bankruptcy during GR BK Rate (%) No Reform Benchmark 0.2 Data Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

46 Results Model Generates Rise in Delinquencies in seen in GR Model suggests that labor markets deterioration key for DQ, reform does not matter Benchmark 14 No Reform 12 DQ Debt (%) 10 8 Data Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

47 Results The distribution of renegotiated debt BK Reform would have made DQ a lot tougher but labor markets intervened Original SS After Reform 0.25 Distribution of h Great Recession h ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

48 Results Bankruptcy in the GR decompositions Job finding is central, not separation BK Rate (%) Separation 0.2 Benchmark Data 0.1 Job Finding Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

49 Results Delinquency in the GR decompositions Again, movements in job finding rate are the key Benchmark 14 Separation 12 Data DQ Debt (%) 10 8 Job Finding Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

50 Results Bankruptcy Reform and Deleveraging Debt more sensitive to income in model than data lenders here learn immediately Mean Debt/Mean Income Index Data Benchmark 60 No Reform Year ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

51 Results The Proximate Cause of Deleveraging Interest Rate (%) b ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

52 Concluding Remarks What we ve done... Have taken a step towards understanding consumer credit use and default during Great Recession ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

53 Concluding Remarks What we ve done... Have taken a step towards understanding consumer credit use and default during Great Recession Model quantitatively consistent with both bk and dq paths in GR ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39

54 Concluding Remarks What we ve done... Have taken a step towards understanding consumer credit use and default during Great Recession Model quantitatively consistent with both bk and dq paths in GR Model suggests that: bankruptcy reform did in fact lower filing rates, given the evolution of labor market risk delinquency not strongly affected by BK reform changes in job finding rates key for default and debt ASTY (FRB, FRB, CUHK, UVa) Bk Reform and the GR December 6, / 39