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The Effect Of Borrowing Constraints On Consumer Liabilities

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Author Info

  • Donald Cox

    (Department of Economics, Boston College)

  • Tullio Japelli

    (Instituto di Studi Economici)

Abstract

This paper explores the liquidity constraint on consumer liabilities. While much empirical evidence attests to the importance of liquidity constraints in the U.S. economy, evidence about the effects of borrowing constraints on consumer balance sheets is scarce. Using the 1983 Survey of Consumer Finances data we estimate desired borrowing for unconstrained households. We then evaluate the gap between predicted and observed debt for the sample of liquidity-constrained consumers. Predicted debt is 75 percent higher than actual debt in the liquidity constrained samples. Thus, the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio. The removal of borrowing constraints would raise aggregate household liabilities by 9 percent.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 228.

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Date of creation: Dec 1993
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Handle: RePEc:boc:bocoec:228

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