Credit When You Need It

Benjamin Collier, Daniel Hartley, Benjamin J. Keys and Jing Xian Ng ()

No WP 2024-16, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We estimate the causal effect of emergency credit on households’ finances after a negative shock. To do so, we link application data from the U.S. Federal Disaster Loan program, which provides loans to households that have uninsured damages from a federally-declared natural disaster, to a panel of credit records before and after the shock. We exploit a discontinuity in the loan approval rules that led applicants with debt-to-income ratios below 40% to be differentially likely to be approved. Using an instrumented difference-in-differences research design, we find that credit provision at the time of a shock significantly reduces severe financial distress, decreasing the likelihood of filing for bankruptcy by 61% in the three years following the disaster. We explore mechanisms using additional quasi-experimental variation in interest rates, finding support for a liquidity-based explanation. Credit provision in a time of crisis has real consumption effects in the form of additional car purchases even 3 years after loan receipt. Our findings suggest that well-timed liquidity provided to households in acute need can have substantial and persistent positive effects.

Keywords: Consumer credit; Personal bankruptcy; Delinquency; Auto loan; Climate risk (search for similar items in EconPapers)
JEL-codes: D14 G23 G28 H81 (search for similar items in EconPapers)
Pages: 55
Date: 2024-08
New Economics Papers: this item is included in nep-mon
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https://doi.org/10.21033/wp-2024-16 (application/pdf)

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Working Paper: Credit When You Need It (2024)
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