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BPEA Article

What Depressed the Consumer? The Household Balance Sheet and the 1973-75 Recession

Abstract

THE RECESSION of 1973-75 was the most severe economic contraction in the postwar era. By the first quarter of 1975, real gross national product had declined nearly 7 percent from its 1973 peak, about twice the decline in real GNP from peak to trough in 1957-58, the most severe previous postwar recession. Why was the recent recession so severe? What were the forces behind this sharp drop in aggregate demand? One salient feature of the 1973-75 period was the unusually unfavorable shift in the balance-sheet position of American households. Recent theoretical and empirical research on the "life cycle" and "liquidity" hypotheses—both of which stress the importance of the consumer's balance-sheet position to consumer expenditure decisions'—suggests that this might be an important contributor to the severity of the recession.

Commenters

Robert J. Gordon

Stanley G. Harris Professor of the Social Sciences - Northwestern University

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