Did Household Indebtedness Hamper Consumption During the Covid-19 Recession? Evidence from Micro Data

We use monthly panel data on 1.3 million individuals to obtain impulse responses of consumption to debt changes. We find a stronger positive correlation between household leverage and a change in contemporaneous spending during the COVID-19 pandemic than the pre-pandemic period. Moreover, the effects are more pronounced for liquidity-constrained households. We find no long-lasting negative effects of household leverage on future spending within the 6-month horizon.