System Working Paper 17-33

The Persistence of Financial Distress

Kartik Athreya | Federal Reserve Bank of Richmond
José Mustre-del-Río | Federal Reserve Bank of Kansas City
Juan M. Sánchez | Federal Reserve Bank of St. Louis

Published December 28, 2017

Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise.

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