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Economic Brief

March 7, 2019

Richmond Fed Research Helps Measure and Explain Consumer Financial Distress

The Richmond Fed’s March Economic Brief highlights new research that helps measure and explain the persistence of financial distress among some U.S. households.

At any moment in time, a large fraction of people have at least one loan account that is severely delinquent. However, most instances (80 percent) of financial distress are accounted for by 20 percent of households that are persistently distressed. To explain these facts, the authors extend a standard model of financial distress in two primary ways. First, the model features “informal default,” such as becoming severely delinquent on loan repayments, as an alternative to “formal default,” such as declaring bankruptcy. Second, the model allows the data to speak to the extent to which households vary in the value they place on immediate spending versus future spending.

The extended model matches the facts well and thus may more accurately inform future public policy debates on consumer debt. For example, when analyzing bankruptcy policy, a model that includes only formal default might lead to the conclusion that stricter bankruptcy laws would reduce the incidence of default, when in reality that approach might simply lead to a shift toward delinquency. At the same time, allowing for variation in household behavior will help evaluate how any policy toward debt default would matter to subgroups within the population.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on current economic issues and trends. Sign up to receive an email notification when a new essay is posted.


As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District—including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia—to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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