Income Risk and Household Debt with Endogenous Collateral Constraints
AbstractWe present a heterogeneous-agent model with incomplete markets, in which household debt need to be collateralized by durable holdings and the lowest attainable labor income. Labor income is risky and households decide how much non-durables to consume, on their position of secured debt and the durable stock. Consumers value durables not only as collateral for their debt but also derive utility from their durable stock. We show that an interest spread between the borrowing and lending rate implies local convexities in the policy functions for non-durable consumption and especially durable holdings which are important quantitatively. Moreover, an increase in income risk decreases average household debt because of the buffer-stock saving motive
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 729.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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household debt; durables; collateral constraints;
Other versions of this item:
- Thomas Hintermaier & Winfried Koeniger, 2006. "Income Risk and Household Debt with Endogenous Collateral Constraints," Computing in Economics and Finance 2006 351, Society for Computational Economics.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
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