Tighter Credit and Consumer Bankruptcy Insurance

Caterina Mendicino, Tiago Cavalcanti, Antonio Antunes, Marcel Peruffo and Anne Villamil

VfS Annual Conference 2021 (Virtual Conference): Climate Economics from Verein für Socialpolitik / German Economic Association

Abstract: How does bankruptcy affect the dynamics of aggregate consumption? We quantify the trade-off between the insurance and creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact because it allows borrowers to sustain consumption, but statutory exclusion from the credit market reduces consumption smoothing over time and slows the recovery. Default costs play a crucial role in bankruptcy decisions and also shape consumption dynamics. We find that the 2005 BAPCPA reform, by making bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening.

Keywords: Financial Shocks; Aggregate Consumption Dynamics; Chapter 7; BAPCPA; Bank-Intermediated Credit; Transitional Dynamics (search for similar items in EconPapers)
JEL-codes: E2 E5 G1 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-fdg, nep-ias and nep-mac
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https://www.econstor.eu/bitstream/10419/242407/1/vfs-2021-pid-50075.pdf (application/pdf)

Related works:
Working Paper: Tighter Credit and Consumer Bankruptcy Insurance (2020)
Working Paper: Tighter Credit and Consumer Bankruptcy Insurance (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc21:242407

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