Consumer Default, Credit Reporting and Borrowing Constraints
66 Pages Posted: 6 Dec 2016
Date Written: December 1, 2016
Why do negative credit events lead to long-term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three-year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade by itself accounts for 25%-65% of their observed decline in borrowing at various horizons over the following several years.
Keywords: Consumer Default, Credit Reporting, Household Borrowing Constraints
JEL Classification: G21, D14, K35
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