Credit Lines

José-Víctor Ríos-Rull and Xavier Mateos-Planas ()

No 894, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a new quantitative theory of long-term unsecured credit contracts. Households can default and can switch credit lines. Banks can change the credit limit at any time, but must commit to the interest rate or not depending on the regulatory setting. Without commitment, the distribution of households over interest rates, credit limits and wealth matches observed patterns. We study the new regulatory rules in the U.S.credit card market which require a stronger commitment from banks not to raise interest rates discretionally. This results in tighter limits but lower interest rates, reduced indebtedness and lower default.

Date: 2009
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Working Paper: Credit Lines (2011)
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