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The Debt-Payment-to-Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys

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  • KATHLEEN W. JOHNSON
  • GENG LI
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Abstract

Liquidity constraints have been proposed as an important explanation for deviations from the rational expectations/permanent income hypothesis. This paper introduces to the liquidity constraint literature the ratio of a household's debt payments to its disposable personal income, the debt service ratio (DSR). We find that a household with a high DSR is significantly more likely to be turned down for credit than other households. Also, the consumption growth of likely constrained households, identified using the DSR along with the liquid-asset-to-income ratio, is significantly more sensitive to past income than that of other households, confirming the DSR's value in identifying constrained households. Copyright (c) 2010 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 42 (2010)
Issue (Month): 7 (October)
Pages: 1373-1390

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Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:7:p:1373-1390

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Hyytinen, Ari & Putkuri, Hanna, 2012. "Household optimism and borrowing," Research Discussion Papers 21/2012, Bank of Finland.
  2. Kathleen W. Johnson & Geng Li, 2011. "Are adjustable-rate mortgage borrowers borrowing constrained?," Finance and Economics Discussion Series 2011-21, Board of Governors of the Federal Reserve System (U.S.).
  3. Braxton, John Carter & Knotek, Edward S., 2014. "Consumer Debt Dynamics: Follow the Increasers," Working Paper 1401, Federal Reserve Bank of Cleveland.
  4. Geng Li, 2012. "Gamblers as personal finance activists," Finance and Economics Discussion Series 2012-18, Board of Governors of the Federal Reserve System (U.S.).
  5. Song Han & Benjamin J. Keys & Geng Li, 2011. "Credit supply to personal bankruptcy filers: evidence from credit card mailings," Finance and Economics Discussion Series 2011-29, Board of Governors of the Federal Reserve System (U.S.).
  6. Meta Brown & Andrew Haughwout & Donghoon Lee & Wilbert van der Klaauw, 2011. "Do we know what we owe? A comparison of borrower- and lender-reported consumer debt," Staff Reports 523, Federal Reserve Bank of New York.

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