On the Importance of Easing Consumer Credit Frictions

Patrick J. Kehoe, Consultant

Virgiliu Midrigan

Elena Pastorino, Visiting Scholar

November 2017 | Federal Reserve Bank of Minneapolis Economic Policy Paper 17-10
The vast bulk of the government financial interventions during the Great Recession was directed at helping banks weather the financial crisis. The design of these programs was heavily influenced by the view that helping banks preserve their means of providing finance to firms was the most important ingredient in ensuring a quick recovery from the crisis. We argue that the cross-state patterns of employment, output and debt in the United States suggest that financial frictions that led to a tightening of credit for consumers were more important in accounting for the recession than those that led to a tightening of credit for firms. Our analysis implies that policies designed to ease consumer credit conditions would have been more effective at ensuring a rapid recovery than the actual policies followed that focused on easing firm credit conditions.