We use data for nearly 800,000 Danish families to examine whether
high household leverage prior to the financial crisis may have
amplified the reduction in household spending over the course of the
crisis. We find a strong negative correlation between pre-crisis
leverage and the change in non-housing consumption during the
crisis, conditional on a range of other household characteristics. The
larger drop in spending among the highly leveraged families reflects
that these families consumed a larger fraction of their income than
their less-leveraged peers prior to the crisis. But as the crisis
unfolded, this difference in consumption levels between high- and
low leverage families vanished. Moreover, we find suggestive
evidence that the drop in consumption for the highly leveraged
families cannot be fully explained by a contraction in credit supply.