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Credit Markets

Paper Session

Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, M105
Hosted By: American Economic Association
  • Chair: John Gibson, Georgia State University

Can the Unemployed Borrow? Implications for Public Insurance

Kyle Herkenhoff
University of Minnesota
Gordon Phillips
Dartmouth College
J. Carter Braxton
University of Minnesota


Do the unemployed have access to credit markets? Yes. Do the unemployed
borrow? Yes. We link administrative earnings records with credit reports
and show that individuals maintain significant access to credit following
job loss. Unconstrained workers who lose their jobs borrow, while
constrained workers who lose their jobs default and delever. Both
default and borrowing allow unemployed workers to boost consumption,
and they pay an interest rate premium to do so, i.e. the credit market
acts as a limited \emph{private} unemployment insurance market. We
show theoretically that long-term relationships and reputation concerns
allow credit markets to serve as a market for private unemployment
insurance despite adverse selection and asymmetric information about
\emph{future job loss}. We then ask, given the degree of credit access
households have, what is the optimal provision of public unemployment
insurance? We find that the optimal provision of public insurance
is unambiguously lower as credit access expands. The median individual
in our simulated economy would prefer to have the income replacement
rate from public unemployment insurance lowered from the current US
policy of 45\% to 35\%. However, a utilitarian planner would actually
prefer to raise UI relative to current US levels, even in the presence
of well-developed credit markets.

Credit Smoothing

Michaela Pagel
Columbia University
Sean Hundtofte
Federal Reserve Bank of New York
Arna Olafsson
Copenhagen Business School


Economists believe that high-interest, unsecured, short-term borrowing, for instance via credit cards, helps individuals to smooth consumption in the event of transitory income shocks. This paper estimates that individuals do not appear to use credit cards to smooth consumption when transitory income shocks such as unemployment occur. In contrast, it appears as if individuals smooth debt balances rather than consumption. Using a representative sample of U.S. households' credit reports, we instrument for local changes in employment using a Bartik (1991) style methodology, based on pre-period county-level industrial composition interacted with nationwide industry trends, and complement this methodology with an individual-level analysis to show that, on average, borrowing does not increase in response to unemployment shocks. This absence of borrowing responses to negative shocks occurs in spite of an excess supply of credit and non-binding liquidity constraints as indicated by credit limits. These findings are difficult to reconcile with theories of consumption smoothing, which would predict a strictly countercyclical demand for credit.

Financial Frictions, Cyclical Fluctuations, and the Growth Potential of New Firms

Christoph Albert
Pompeu Fabra University and Barcelona GSE
Andrea Caggese
Pompeu Fabra University


We develop a model in which entrepreneurs choose between startup types with heterogeneous
short- and long-run growth potential, and we generate testable predictions on
the differential effects of financial factors and cyclical fluctuations on these startups. Using
a multi-country entrepreneurship survey, we find that, consistent with the model, higher
borrowing costs during financial crises negatively affect high-growth startups considerably
more than low-growth startups, especially during severe downturns. Our results, supported
by additional tests using sector-level financial frictions indicators, uncover a new channel
that is potentially important to explain slow recoveries after financial crises.

Credit Markets Around theWorld, 1910-2014

Karsten Müller
Princeton University


How have credit markets evolved in the long-run around the world? I present evidence based on a novel sectorally disaggregated dataset on credit to the private sector for 120 countries for 1940-2014, as well as new series on total credit going back to 1910. Over the last 50 years, household credit has risen dramatically not only in advanced but also emerging economies. Mortgage lending only accounts for part of the story: particularly in developing countries, consumer credit accounts for much of this growth. I show that corporate lending has essentially stalled relative to GDP since around 1980, which is not explained by the development of global bond markets, cross-border lending, or trade credit. While the main drivers are country-specific, the rise of household credit correlates with financial deregulation, information sharing institutions, demographic shifts, inequality, and legal frameworks.

The Origins of Aggregate Fluctuations in a Credit Network Economy

Levent Altinoglu
Federal Reserve Board


I show that inter-firm lending plays an important role in business cycle fluctuations.
I first build a tractable network model of the economy in which trade in intermediate
goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms propagate financial shocks, amplifying their aggregate effects by about 30 percent. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I then estimate aggregate and idiosyncratic shocks to industries in the US and find that financial shocks are a prominent driver of cyclical fluctuations, accounting for two-thirds of the drop in industrial production during the Great Recession. Furthermore, idiosyncratic financial shocks to a few key industries can explain a considerable portion of these effects. In contrast, productivity shocks had a negligible impact during the recession.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles