Credit Supply Shocks and Household Defaults

CERGE-EI Working Paper Series No. 691

55 Pages Posted: 20 Apr 2021

See all articles by Mikhail Mamonov

Mikhail Mamonov

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Anna Pestova

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: April 1, 2021

Abstract

Are disruptions of the mortgage market a consequence of financial imbalances accumulated in the past? In this paper, we study the effects of positive and negative credit supply (CS) shocks on subsequent household defaults on debt over the last four decades in U.S. states. We apply sign restrictions within a VAR framework to isolate state-level CS shocks, and identify that 1984 and 2004 were the years of systemic, countrywide, positive CS shocks whereas 1989 and 2009 brought systemic negative shocks. Further, by employing a difference-in-differences framework, we find that both positive and negative CS shocks lead to greater household defaults in the future if they also increase mortgage-to-income ratios. We show that the CS shock-induced (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices facilitate the accumulation of default risks. Our results indicate that positive CS shocks occurred in 1984 did not raise household defaults by more in more exposed states compared to less exposed states because the shocks increased both future income and mortgage debt, while not affecting mortgage-to-income ratios. In contrast, the 1989, 2004 and 2009 CS shocks increased mortgage-to-income ratios in subsequent years, thereby raising debt delinquencies and household defaults. These results provide further empirical evidence to theories of endogenous credit cycles.

Keywords: Household finance, Banking, Credit supply, Financial instability, Mortgage, Difference-in-differences, VARs, U.S. states, PSID, CEX

JEL Classification: C34, G21, G33

Suggested Citation

Mamonov, Mikhail and Pestova, Anna, Credit Supply Shocks and Household Defaults (April 1, 2021). CERGE-EI Working Paper Series No. 691, Available at SSRN: https://ssrn.com/abstract=3829990 or http://dx.doi.org/10.2139/ssrn.3829990

Mikhail Mamonov (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

Anna Pestova

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

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