Household Debt and Economic Recovery Evidence from the U.S. Great Depression

The Great Recession has focused renewed attention on the role of household leverage in the business cycle. Household debt overhang and the ensuing process of deleveraging are often cited as factors holding back economic recovery. This paper studies the relationship between household debt and economic performance during the Great Depression in the U.S. on the state level. Using a newly compiled dataset, I present evidence that debt overhang in the household sector acted as a severe drag on economic recovery in the 1930s. States with higher initial debt-to-income ratios recovered considerably slower. These findings point toward a close link between the accumulation of debt and the severity and duration of recessions.