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Consumer debt non-payment and the borrowing constraint: Implications for consumer behavior

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Abstract

This paper examines whether the consumption behavior of a borrowing-constrained household is affected by debt non-payment. From the household's intertemporal maximization problem, we derive a two-equation model consisting of augmented forms of the standard consumption Euler equation and the static labor supply equation. We estimate these equations by using nonlinear GMM and obtain estimates inter alia for the discount factor and the debt-payment-to-income ratio. The former is found to be much lower than the values often used in model calibrations in the literature, showing a high degree of impatience of households. The latter is close to the values reported in the consumer credit literature. Our results are found to be robust to a number of specification tests under different types of household preferences. These results are also subjected to a comparative analysis with the results derived from the consumption Euler equation under full debt repayment and no borrowing constraint.

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Previous tests for liquidity constraints using consumption Euler equations have frequently split the sample on the basis of wealth, arguing that low-wealth consumers are more likely to be constrained. We propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 Survey of Consumer Finances. In a first stage we estimate probabilities of being constrained, which are then utilized in a second sample, the Panel Study of Income Dynamics, to estimate switching regression models of the Euler equation. Our estimates indicate stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
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This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labor productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption. (Copyright: Elsevier)
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The intertemporal labor-supply elasticity is often a central element in macroeconomic analysis. We argue that assumptions underlying previous econometric estimates of the labor supply elasticity are inconsistent with incomplete-markets economies. In particular, if the econometrician ignores borrowing constraints, the elasticity will be biased downwards. We assess this bias using artificial data generated by a model in which we know the true elasticity and real-world data from the Panel Study of Income Dynamics. When applying standard econometric methods on the artificial data, we estimate an elasticity that is 50 percent lower than the true elasticity. We find evidence of a similar bias when using real-world data. (Copyright: Elsevier)
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This paper proposes that the time-series data on consumption, income, and interest rates are best viewed as generated not by a single representative consumer but by two groups of consumers. Half the consumers are forward-looking and consume their permanent income, but are extremely reluctant to substitute consumption temporarily. Half the consumers follow the "rule of thumb" of consuming their current income. The paper documents three empirical regularities that, it argues, are best explained by this medal. First, expected changes in income are associated with expected changes in consumption. Second, expected real interest rates are not associated with expected changes in consumption. Third, periods in which consumption is high relative to income are typically followed by high growth in income. The paper concludes by briefly discussing the implications of these findings for economic policy and economic research.
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This paper explores the liquidity constraint on consumer liabilities. While much empirical evidence attests to the importance of liquidity constraints in the U.S. economy, evidence about the effects of borrowing constraints on consumer balance sheets is scarce. Using the 1983 Survey of Consumer Finances data we estimate desired borrowing for unconstrained households. We then evaluate the gap between predicted and observed debt for the sample of liquidity-constrained consumers. Predicted debt is 75 percent higher than actual debt in the liquidity constrained samples. Thus, the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio. The removal of borrowing constraints would raise aggregate household liabilities by 9 percent.
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I develop and estimate a monetary business cycle model with nominal loans and collateral constraints tied to housing values. Demand shocks move housing and nominal prices in the same direction, and are amplified and propagated over time. The financial accelerator is not uniform: nominal debt dampens supply shocks, stabilizing the economy under interest rate control. Structural estimation supports two key model features: collateral effects dramatically improve the response of aggregate demand to housing price shocks; and nominal debt improves the sluggish response of output to inflation surprises. Finally, policy evaluation considers the role of house prices and debt indexation in affecting monetary policy trade-offs.
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This article estimates the degree of hyperbolic discounting in a job search model quantitatively, using data on unemployment spells and accepted wages from the NLSY. The results point to a substantial degree of hyperbolic discounting for low and medium wage workers. The structural estimates are then used to evaluate alternative policy interventions aimed at reducing unemployment. The estimated effects of a given policy can vary by up to 40%, depending on the assumed type of time discounting. Some interventions may raise the long-run utility of hyperbolic workers, and at the same time reduce unemployment duration and lower government expenditures. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2008.
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In this study, we develop and test a methodology to assess the impact of affordable lending efforts on homeownership rates. More narrowly, we examine the impact of using flexible underwriting guidelines, primarily changes in the down payment and housing burden requirements, on the affordability and homeownership propensities of targeted populations and geographic areas. The impacts of changing these underwriting guidelines are compared with those resulting from lower borrowing costs (interest rates). A variation of the methodology first proposed by Wachter et al. (1996) is used in the analysis. We use the 1995 American Housing Survey (AHS) national core in the analysis. The findings indicate that affordable lending efforts are likely to increase homeownership opportunities for underserved populations, but that impacts may not be felt equally by all groups. Under most affordable products, the impacts on all households, recent movers and central city households are smaller than for other households. The recently introduced affordable products which permit the 3% down payment to come from non-borrower sources, e.g., Freddie Mac’s Alt 97, has the largest impact on the homeownership propensities of all underserved groups, including a 27.1% increase in the relative probability of homeownership for young households, a 21.0% increase for blacks, and a 15.0% increase for central city residents. Consistently, changes in underwriting guidelines are found to have greater impacts than changes in the costs of borrowing for all groups.
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We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked.
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This article surveys J. D. Sargan's work on instrumental variables (IV) estimation and its connections with the generalized method of moments (GMM). First the modeling context in which Sargan motivated IV estimation is presented. Then the theory of IV estimation as developed by Sargan is discussed. His approach to efficiency, his minimax estimator, tests of overidentification and underidentification, and his later work on the finite-sample properties of IV estimators are reviewed. Next, his approach to modeling IV equations with serial correlation is discussed and compared with the GMM approach. Finally, Sargan's results for nonlinear-in-parameters IV models are described.
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