Do Remittances Complement or Substitute for Consumer Credit? The Relevance of Heterogeneous Effects in the Mexican Context

Abstract

There is no clear theoretical prediction about whether a positive income shock stemming from higher remittances should complement or substitute for credit. Accordingly, existing studies in the empirical literature have found opposing results. This paper reconciles these seemingly contradictory findings by being the first to exploit borrowers´ income heterogeneity, and differences among credit types to investigate the effects of remittances on consumer credit and credit delinquency rates. To identify the effects of remittances, we use a proprietary dataset capturing a large proportion (83 %) of the consumer credit in Mexico and instrument for remittances with a municipality-level exposure to US unemployment. We find a substitution effect concentrated on low-income borrowers for whom remittances make it easier to pay off loans with the highest interest rates and the shortest maturities. In contrast, we find a complementary effect for loans with the lowest interest rates and the longest maturities, regardless of borrowers’ income.

Keywords: Remittances, Consumer Credit, Default, Mexico

JEL Classification: G51, F30, F22