Identifying the transmission channels of credit supply shocks to household debt: Price and non-price effects

Alexandra Varadi

European Economic Review, 2024, vol. 166, issue C

Abstract: Using UK matched microdata, I show that credit supply shocks affect mortgage debt via two channels: one that operates through price conditions in credit markets; and another that operates through non-price credit conditions and affects the quantity of credit supplied by lenders. I find substantial heterogeneity in the different channels by household characteristics. Lower-income households and first-time buyers are especially sensitive to changes in the supply of riskier lending. Home-owners, higher-income households and older borrowers increase debt following shocks to either type of credit conditions, with loosening in mortgage spreads, maximum LTI limits and loan approvals being strongly correlated with their borrowing levels. In aggregate, household leverage responds more strongly to supply shocks that change the quantity of credit, as they affect households across the distribution, both at the intensive and at the extensive margin. But a loosening in price and non-price credit conditions simultaneously or a contraction in multiple price indicators at a time can also fuel rapid credit growth.

Keywords: Household finance; Bank lending; Credit conditions; Mortgages (search for similar items in EconPapers)
JEL-codes: D14 E44 G21 G51 O16 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:166:y:2024:i:c:s001429212400076x

DOI: 10.1016/j.euroecorev.2024.104747

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