What Depressed the Consumer? The Household Balance Sheet and the 1973-75 Recession
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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.
[1] Richard V. L. Cooper. EFFICIENT CAPITAL MARKETS AND THE QUANTITY THEORY OF MONEY , 1974 .
[2] Milton Friedman,et al. The Lag in Effect of Monetary Policy , 1961, Journal of Political Economy.