Consumption insurance and credit shocks

Stefan Wöhrmüller

Working Papers from DNB

Abstract: This paper studies how credit shocks affect the pass-through of idiosyncratic productivity shocks to consumption. Using a heterogeneous-agent incomplete-markets model I simulate two different credit shock dynamics as observed in credit panel data, a permanent and a mean-reverting one, and measure consumption insurance along the entire transition path. I show that consumption insurance against idiosyncratic productivity shocks drops on impact for both kind of credit shocks, while they imply qualitative different consumption insurance paths in the medium run. Importantly, I find that these paths differ by current wealth holdings. Asset-poor households experience the largest decrease in consumption insurance, whereas asset-rich households actually have access to more consumption insurance subsequent to a credit shock. Finally, endogenous labor supply attenuates these dynamics.

Keywords: consumption insurance; credit shocks; incomplete markets (search for similar items in EconPapers)
JEL-codes: D31 D52 E21 E44 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:825

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