Energy price shocks and consumer deleveraging: Is there evidence of some relationship?

In this paper, we extend on past research, in which we assess the interactive effects of real gasoline prices, real motor vehicle expenditures and employment in search of an alternative mechanism through which real gasoline price shocks impact economic activity.  The inspiration behind the paper draws on an attempt to integrate two different strains of research regarding business cycles: one on household leveraging and macroeconomic activity (Krugman, 1998; Eggertsson and Woodford, 2003; Eggertsson and Krugman, 2010; Eggertsson and Mehrotra, 2014) and another on the energy cost/macroeconomic relationship (Hamilton, 1983; Hamilton, 2009; Hamilton, 2012; Barsky and Kilian, 2001; Kilian, 2008). Our research question is: do energy cost shocks affect household consumer behavior and ultimately macroeconomic activity? 

Our paper will draw heavily on the theoretical work of Eggertson and Krugman and is also strongly motivated by the empirical work of Hamilton and Kilian.  Historically, the primary mechanism by which energy shocks affect economic activity is presumed to occur through the aggregate supply function.  In this paper, we ask the question does it work through the aggregate demand function.

A couple of mechanisms by which energy cost shocks may affect aggregate consumption come to mind: first energy cost shocks may influence consumer confidence which may lead to changes in consumer spending and eventually economic activity, and second, energy costs shocks may re-enforce a debt-driven slump in which household deleveraging leads to a decline in aggregate demand.  Do these energy cost shocks contribute to this process and are there some important thresholds at which the dynamic interplay of household debt and energy cost become relevant?  These are some of the questions that we attempt to answer in this paper.