Working Paper: NBER ID: w19850
Authors: Olivier Coibion; Yuriy Gorodnichenko; Marianna Kudlyak; John Mondragon
Abstract: 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.
Keywords: household borrowing; income inequality; credit supply; financial crisis
JEL Codes: D14; E21; E51; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local income inequality (D31) | debt accumulation patterns (F34) |
| local income inequality (D31) | less borrowing by low-income households (G51) |
| local income inequality + household income ranks (D31) | differential borrowing patterns (F34) |
| low-income households in high-inequality regions (R20) | less debt accumulation relative to income (G51) |
| high-income households in high-inequality regions (R20) | more debt accumulation relative to income (H69) |