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Intertemporal Consumption and Credit Constraints: Does Total Expenditure Respond to an Exogenous Shock to Credit?

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Abstract:

There is continuing controversy over the importance of credit constraints. This paper investigates whether total household expenditure and debt is affected by an exogenous increase in access to credit provided by a credit market reform that enabled Danish house owners to use housing equity as collateral for consumption loans. We find that the magnitude of the response is correlated with the amount of equity released by the reform and that the effect is strongest for younger households. Even for this group, the response was moderate. The aggregate effect of the reform was significant but small.

Document Type: Research Article

DOI: https://doi.org/10.1257/aer.100.3.1080

Publication date: 2010-06-01

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