Working Paper: NBER ID: w17583
Authors: Veronica Guerrieri; Guido Lorenzoni
Abstract: We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.
Keywords: Credit Crises; Precautionary Savings; Liquidity Trap
JEL Codes: E2; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit crunch (E51) | constrained borrowers reduce debt (G51) |
| constrained borrowers reduce debt (G51) | reduction in consumer spending (D12) |
| reduction in consumer spending (D12) | increase in precautionary savings among unconstrained agents (E21) |
| increase in precautionary savings among unconstrained agents (E21) | net increase in lending (G21) |
| net increase in lending (G21) | drop in interest rates (E43) |
| credit crunch (E51) | drop in interest rates (E43) |
| reduction in consumer spending vs increase in labor supply (J20) | output response to credit shock (E51) |
| 10 percentage point reduction in household debt-to-GDP (G51) | 1% drop in output on impact (F69) |
| nominal rigidities and zero lower bound on interest rates (E43) | more pronounced contraction (J41) |
| introduction of durable goods (L68) | affects borrowing behavior and output responses (F65) |
| credit limit shock (G21) | impacts durable purchases differently based on borrowing limits or credit spreads (G51) |