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Incomplete Markets and the Evolution of US Consumer Debt

Author

Listed:
  • Winfried Koeniger

    (IZA & University of Bonn)

  • Thomas Hintermaier

    (Institute for Advanced Studies Vienna)

Abstract

Consumer debt has increased substantially in the US since the 1980s. We show in a incomplete-markets model with durables and occasionally binding collateral constraints that neither the higher uninsurable income risk of US consumers nor the financial deregulation explain this increase. The reason is that uninsurable risk increases the buffer-stock saving motive and that agents who are at the collateral constraint find it optimal not to hold durables. We find instead that the observed fall in the real interest rate by 2 percentage points explains 92% of the actual increase in consumer debt.

Suggested Citation

  • Winfried Koeniger & Thomas Hintermaier, 2007. "Incomplete Markets and the Evolution of US Consumer Debt," 2007 Meeting Papers 256, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:256
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    References listed on IDEAS

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    Cited by:

    1. Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.

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