This situation, coupled with households actively paying down their debt or cutting down on new borrowing, marked the beginning of household deleveraging. In this article, Wenli Li and Susheela Patwari discuss recent theoretical and empirical work by economists that sheds light on the process of leveraging and deleveraging and that helps to provide answers to a number of questions, such as: What determines when and how much a household borrows? What helps account for the widely noted increase in consumer debt levels in the run-up to the financial crisis? Finally, how has deleveraging progressed, and what are the implications for consumption and the broader economy?

This article appeared in the Third Quarter 2012 edition of Business Review.

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