Leverage under Pressure: Household Liquidity and Financial Resilience during the 2022 Inflation Shock

Sammanfattning

This thesis investigates whether high household leverage constrained the accumulation of real liquidity buffers during the 2022 inflationary episode in the United States. Using a difference-in-differences design applied to repeated cross-sectional data from the Survey of Consumer Finances, I show a clear divergence in households' ability to preserve real liquidity when prices rose rapidly. High-debt households experienced a 4.0 percentage point relative decline in their real liquidity-to-income ratios compared to low-debt households, a result strongly confirmed by a Poisson robustness test. The effect is highly uneven across the income distribution: low-income households faced an 8.9 percentage point decline, an effect more than three times larger than that of high-income households. The mechanism binds for both consumer and mortgage debt, and older households relying on rigid income sources recorded the sharpest contraction. Overall, the evidence indicates that leverage acted as a binding constraint during the inflation shock. It is also suggested that targeted debt-service relief may be more effective than broad income support in strengthening household resilience in the future.