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Lending Standards and Consumption Insurance over the Business Cycle


  • Kyle Dempsey

    (The Ohio State University)

  • Felicia Ionescu

    (Federal Reserve Board)


How much do changes in credit supply affect consumers’ ability to insure against income risk over the business cycle and what is the valuation of such insurance? Using loan-level data from the Senior Loan Officer Opinion Survey (SLOOS), we construct measures of key credit supply variables, such as lending standards and terms for consumer credit in the U.S. and build a heterogeneous model of unsecured credit and default that accounts for credit supply dynamics as estimated from these data. Our economy is quantitatively consistent with key features of the unsecured credit market, earnings dynamics, and measures of consumption volatility in the U.S. We find that variability in standards and terms for credit is welfare improving despite the loss in consumption insurance that such an environment may induce. The key mechanism behind this result is the asymmetric effect that changes in standards induce for loan pricing in good and bad states of the economy.

Suggested Citation

  • Kyle Dempsey & Felicia Ionescu, 2019. "Lending Standards and Consumption Insurance over the Business Cycle," 2019 Meeting Papers 1428, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1428

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    References listed on IDEAS

    1. Lown, Cara & Morgan, Donald P., 2006. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1575-1597, September.
    2. Kartik Athreya & José Mustre-del-Río & Juan M Sánchez, 2019. "The Persistence of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3851-3883.
    3. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
    4. Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 399-441.
    5. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    6. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
    7. Olga Gorbachev & Maria Jose Luengo-Prado, 2016. "The credit card debt puzzle: the role of preferences, credit risk, and financial literacy," Working Papers 16-6, Federal Reserve Bank of Boston, revised 07 Jul 2016.
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    Cited by:

    1. António R. Antunes & Tiago Cavalcanti & Caterina Mendicino & Marcel Peruffo & Anne Villamil, 2019. "Tighter Credit and Consumer Bankruptcy Insurance," Working Papers w201921, Banco de Portugal, Economics and Research Department.

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