The Macroeconomics of Consumer Finance

This paper studies the macroeconomic effects of consumer credit conditions in an incomplete-market, general equilibrium model where households hold unsecured debt, and firms use labor. I show that consumer finance disturbances can cause business cycle fluctuations through a rich interplay between credit and labor risks. As unemployment rises, households are more likely to default, translating into tighter credit conditions that reduce their consumption and cause further unemployment. Such feedback loop is reinforced by precautionary-saving motives among unconstrained households. Surprisingly, this mechanism can explain a large fraction of the volatility and persistence of U.S. unemployment even though it abstracts from traditional frictions like search or price stickiness