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Consumption and Credit Constraints: A Model and Evidence for Ireland

Petra Gerlach-Kristen () and Rossana Merola

No WP471, Papers from Economic and Social Research Institute (ESRI)

Abstract: Since the onset of the financial crisis, consumption has fallen in many economies. This paper presents a small-scale DSGE model with occasionally binding credit constraints. Indebted households start facing credit constraints when the value of their main asset, which we assume to be housing, declines. As a response, they stop smoothing consumption and deleverage. We show that even households that only expect to face a credit constraint in the future deleverage. In an Irish dataset collected during the crisis, we reject the permanent income hypothesis for highly leveraged households and thus find evidence for a disruption in consumption smoothing. This effect suggests the presence of credit constraints.

Keywords: DSGE/Ireland/housing; collateral/Occasionally; binding; credit; constraint (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-dge and nep-ure
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Citations: View citations in EconPapers (5) Track citations by RSS feed

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Journal Article: Consumption and credit constraints: a model and evidence from Ireland (2019) Downloads
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