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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

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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  • Kathleen W. Johnson & Geng Li, 2010. "The Debt-Payment-to-Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1373-1390, October.
  • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:7:p:1373-1390
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    1. Mikael Juselius & Claudio Borio & Piti Disyatat & Mathias Drehmann, 2017. "Monetary Policy, the Financial Cycle, and Ultra-Low Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 55-89, September.
    2. Kathleen W. Johnson & Geng Li, 2014. "Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 457-471, June.
    3. Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
    4. Mathias Drehmann & Anamaria Illes & Mikael Juselius & Marjorie Santos, 2015. "How much income is used for debt payments? A new database for debt service ratios," BIS Quarterly Review, Bank for International Settlements, September.
    5. Juselius, Mikael & Drehmann, Mathias, 2016. "Leverage dynamics and the burden of debt," Research Discussion Papers 3/2016, Bank of Finland.
    6. 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.).
    7. Braxton, John Carter & Knotek, Edward S., 2014. "Consumer Debt Dynamics: Follow the Increasers," Working Paper 1401, Federal Reserve Bank of Cleveland.
    8. Sheng Guo & William G. Hardin, 2017. "Financial and Housing Wealth, Expenditures and the Dividend to Ownership," The Journal of Real Estate Finance and Economics, Springer, vol. 54(1), pages 58-96, January.
    9. Mikael Juselius & Anton Korinek & Mathias Drehmann, 2017. "Debt Service: The Painful Legacy of Credit Booms," 2017 Meeting Papers 1258, Society for Economic Dynamics.
    10. Hyytinen, Ari & Putkuri, Hanna, 2012. "Household optimism and borrowing," Research Discussion Papers 21/2012, Bank of Finland.
    11. 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.).
    12. Brown, Meta & Haughwout, Andrew F. & Lee, Donghoon & Van der Klaauw, Wilbert, 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, revised 01 Oct 2013.
    13. Aladangady, Aditya, 2014. "Homeowner Balance Sheets and Monetary Policy," Finance and Economics Discussion Series 2014-98, Board of Governors of the Federal Reserve System (U.S.).
    14. Mikael Juselius & Mathias Drehmann, 2015. "Leverage dynamics and the real burden of debt," BIS Working Papers 501, Bank for International Settlements.
    15. Sheng Guo & William Hardin, 2015. "Financial and Housing Wealth, Expenditures and the Dividend to Ownership," Working Papers 1506, Florida International University, Department of Economics.
    16. Einian, Majid & Nili, Masoud, 2016. "Consumption Smoothing and Borrowing Constraints: Evidence from Household Surveys of Iran," MPRA Paper 72461, University Library of Munich, Germany.
    17. Amaral, Pedro S., 2017. "Monetary Policy and Inequality," Economic Commentary, Federal Reserve Bank of Cleveland, issue January.

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