Incomplete Markets and the Evolution of US Consumer Debt

Winfried Koeniger and Thomas Hintermaier

No 256, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: Consumer debt has increased substantially in the US since the 1980s. We show in a incomplete-markets model with durables and occasionally binding collateral constraints that neither the higher uninsurable income risk of US consumers nor the financial deregulation explain this increase. The reason is that uninsurable risk increases the buffer-stock saving motive and that agents who are at the collateral constraint find it optimal not to hold durables. We find instead that the observed fall in the real interest rate by 2 percentage points explains 92% of the actual increase in consumer debt.

Date: 2007
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