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Local financialization, household debt, and the great recession
Author(s) -
Petach Luke
Publication year - 2020
Publication title -
papers in regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.937
H-Index - 64
eISSN - 1435-5957
pISSN - 1056-8190
DOI - 10.1111/pirs.12505
Subject(s) - financialization , great recession , economics , boom , debt , shock (circulatory) , recession , monetary economics , per capita , financial system , labour economics , finance , macroeconomics , medicine , population , demography , environmental engineering , sociology , engineering
To test the relationship between local financial sector activity and household borrowing, I exploit the credit‐supply shock that occurred prior to the Great Recession as a plausibly exogenous source of variation in borrowing behavior. Using a difference‐in‐differences approach I find that per‐capita indebtedness increased by several thousand dollars—approximately 10%—more in states with a large local financial sector during the housing market boom. A similar positive relationship between financialization and indebtedness holds at the county level. These results suggest the growing influence of local financial markets as a fundamental cause of the Great Recession.