Credit Supply in the Great Recession

1. Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data by Olivier Coibion, Marianna Kudlyak, Yuriy Gorodnichenko, John Mondragon

One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to “keep up” with higher- income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants’ incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.

2. Credit-Induced Boom and Bust by Marco Di Maggio and Amir Kermani:

Can a credit expansion induce a boom and bust in house prices and real economic activity? This paper exploits the federal preemption of national banks from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. Specifically, we exploit the heterogeneity in the market share of national banks across counties in 2003 and that in state anti-predatory laws to instrument for an outward shift in the supply of credit. First, a comparison between counties in the top and bottom deciles of presence of national banks in states with anti-predatory laws suggests that the preemption regulation produced an 11% increase in annual lending. Our estimates show that to this lending increase is associated with a 12% rise in house prices and a 2% expansion of employment in the non-tradable sectors, followed by drops of similar magnitude in subsequent years. Finally, we show that the increase in the supply of credit reduced mortgage delinquency rates during the boom years but increased them in bust years. These effects are even stronger for subprime and inelastic regions.

 

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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