Working Paper: CEPR ID: DP15133
Authors: Seungcheol Lee; Ralph Luetticke; Morten Ravn
Abstract: Consumer credit spreads significantly impact consumption and asset dynamics, affecting indebted households' spending behavior and the income sensitivity of consumption. Analyzing Danish data, we find that elevated credit spreads reduce consumption of indebted households. Our results suggest that the marginal propensity to consume (MPC) is countercyclical, with credit spreads playing a crucial role. We develop a HANK model, incorporating bank financing for both firms and households. Agency frictions generate a countercyclical credit spread, which induces heterogeneous incidence of aggregate shocks consistent with the data. Banking regulation, while stabilizing at the aggregate level, may induce volatility at the household level.
Keywords: business cycles; financial frictions; incomplete markets; macroprudential policy; monetary policy
JEL Codes: C11; D31; E32; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| frictional financial intermediation (G29) | endogenous countercyclical spread (E32) |
| endogenous countercyclical spread (E32) | consumption smoothing (D15) |
| aggregate shocks (E10) | endogenous countercyclical spread (E32) |
| endogenous countercyclical spread (E32) | differential impacts on households based on net asset positions (D14) |
| macroprudential regulation (G18) | consumption smoothing (D15) |
| macroprudential regulation (G18) | welfare effects (D69) |
| consumer loan spread (G21) | consumption inequality (D31) |
| cross-sectional consumption inequality (E21) | consumer loan spread (G21) |