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Tighter Credit and Consumer Bankruptcy Insurance

Author

Listed:
  • Mendicino, Caterina
  • Cavalcanti, Tiago
  • Antunes, Antonio
  • Peruffo, Marcel
  • Villamil, Anne

Abstract

How does bankruptcy affect the dynamics of aggregate consumption? We quantify the trade-off between the insurance and creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact because it allows borrowers to sustain consumption, but statutory exclusion from the credit market reduces consumption smoothing over time and slows the recovery. Default costs play a crucial role in bankruptcy decisions and also shape consumption dynamics. We find that the 2005 BAPCPA reform, by making bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening.

Suggested Citation

  • Mendicino, Caterina & Cavalcanti, Tiago & Antunes, Antonio & Peruffo, Marcel & Villamil, Anne, 2021. "Tighter Credit and Consumer Bankruptcy Insurance," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242407, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc21:242407
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    Keywords

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets

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