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Job Loss, Credit Constraints and Consumption Growth

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  • Thomas F. Crossley

    ()
    (Koc University, University of Cambridge and Institute for Fiscal Studies)

  • Hamish W. Low (corresponding author)

    ()
    (University of Cambridge and Institute for Fiscal Studies)

Abstract

We use direct evidence on credit constraints to study their importance for household consumption growth and for welfare. We distentangle the direct effect on consumption growth of a currently binding credit constraints from the indirect effect of a potentially binding credit constraint which generates consumption risk. Our data is focused on job losers. We find that less than 5% of job losers experience a binding credit constraint, but for those that do, they experience significant welfare losses, and consumption growth is 24% higher than for the rest of the population. However, even among those who are currently unconstrained and who are able to borrow if needed, consumption responds to transitory income.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1126.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1126.

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Length: 28 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:koc:wpaper:1126

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Keywords: Job Loss; Credit Constraints; Consumption;

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References

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  1. Martin Browning & Thomas Crossley, 2003. "Shocks, Stocks and Socks," Department of Economics Working Papers 2003-07, McMaster University.
  2. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
  3. Susan E. Mayer & Christopher Jencks, 1989. "Poverty and the Distribution of Material Hardship," Journal of Human Resources, University of Wisconsin Press, vol. 24(1), pages 88-114.
  4. Martin Browning & Thomas F. Crossley, 2009. "Shocks, Stocks, and Socks: Smoothing Consumption Over a Temporary Income Loss," Journal of the European Economic Association, MIT Press, vol. 7(6), pages 1169-1192, December.
  5. Hans G. Bloemen & Elena G. F. Stancanelli, 2005. "Financial Wealth, Consumption Smoothing and Income Shocks Arising from Job Loss," Economica, London School of Economics and Political Science, vol. 72(3), pages 431-452, 08.
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Cited by:
  1. Thomas Crossley & Hamish Low, 2011. "Borrowing constraints, the cost of precautionary saving and unemployment insurance," International Tax and Public Finance, Springer, vol. 18(6), pages 658-687, December.
  2. Sule Alan & Thomas Crossley & Hamish Low, 2012. "Saving on a rainy day, borrowing for a rainy day," IFS Working Papers W12/11, Institute for Fiscal Studies.

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