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Explaining the Cyclical Volatility of Consumer Debt Risk

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  • Carlos Madeira

Abstract

Previous studies of consumer debt risk estimate low sensitivities to negative economic shocks, contradicting the historical data. This work proposes a heterogeneous agents' model of household finances and credit risk. Families suffer labor income shocks and choose from a menu of new loans contracts, defaulting on debt commitments when unable to finance minimum consumption standards. Using survey data I simulate household credit default for Chile over the last 20 years, replicating successfully the highs and lows of consumer delinquency. Households, especially those of low income, are shown to be highly vulnerable to changes in interest rates, credit maturities and liquidity.

Suggested Citation

  • Carlos Madeira, 2016. "Explaining the Cyclical Volatility of Consumer Debt Risk," Working Papers Central Bank of Chile 772, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:772
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    References listed on IDEAS

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    1. Daisy J. Pacheco-Bernal & Santiago D. Segovia-Baquero & Ana M. Yaruro-Jaime, 2017. "Vulnerabilidades financieras de los hogares en Colombia," Borradores de Economia 1026, Banco de la Republica de Colombia.

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