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Incomplete Markets and the Evolution of US Consumer Debt

  • Winfried Koeniger

    (IZA & University of Bonn)

  • Thomas Hintermaier

    (Institute for Advanced Studies Vienna)

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.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 256.

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Date of creation: 2007
Date of revision:
Handle: RePEc:red:sed007:256
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  18. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  19. Caporale, Tony & Grier, Kevin B, 2000. "Political Regime Change and the Real Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 320-34, August.
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