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Household Debt and Credit Constraints: Comparative Micro Evidence From Four OECD Countries Jonathan Crook (U Edinburgh) Stefan Hochguertel (VU Amsterdam)

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Presentation on theme: "Household Debt and Credit Constraints: Comparative Micro Evidence From Four OECD Countries Jonathan Crook (U Edinburgh) Stefan Hochguertel (VU Amsterdam)"— Presentation transcript:

1 Household Debt and Credit Constraints: Comparative Micro Evidence From Four OECD Countries Jonathan Crook (U Edinburgh) Stefan Hochguertel (VU Amsterdam) od1

2 Introduction Debt holding has increased over last 15 yrs Empirical literature on liquidity constraints has not come up yet with internationally comparative figures: how important are they? Arguably, importance of both debt holding and constraints differs across countries Institutional differences between countries will matter od2

3 Household Debt in OECD Countries ============================================== Debt/YD Mortg/GDP 1995 2005 %  1992 2002 %  ---------------------------------------------- DK 112.9 155.2 37.5 63.9 74.3 16.3 NL 63.4 134.1 111.5 40.0 78.8 97.0 PORT 46.8 112.6 140.6 12.8 49.8 289.1 US 78.8 111.1 41.0 45.3 58.0 28.0 SP 47.4 93.5 97.3 11.9 32.3 171.4 GER 74.3 83.2 12.0 38.7 54.0 39.5 SW 54.7 78.3 43.1 37.5 40.4 7.7 FR 47.8 65.2 36.4 21.0 22.8 8.6 BEL 45.7 54.2 18.6 19.9 27.9 40.2 FIN 47.2 58.6 24.1 37.2 31.8 -14.5 GR 8.6 44.9 422.1 4.0 13.9 247.5 IT 24.6 43.1 75.2 6.3 11.4 81.0 ============================================== Source: OECD od3

4 This Paper Use micro data from four OECD countries (Italy, US, NL, Spain) and estimate equations for ‘demand for debt’ and ‘credit constraints’ Consider various selection issues Provide comparable estimates and relate this, where possible, to differential incentives and constraints arising out of differing institutional designs between countries od4

5 Find: pronounced differences as regards effects of incomes, net worth, age, household composition Selection effects of various kinds appear unimportant for debt holding equations DYYP [= difference between current and ‘permanent income’] has differential effects for credit applications, credit constraints, and conditional debt holding: –applications:“–” NL,“0” IT, US, SP –constraints:“0” NL,“+” IT, US, “0” SP –debt holding:“0” IT,“–” NL, US, “0” SP od5

6 Simulation Results Assume CRRA utility function;  R=1; bequests=0. Individuals retire at fixed date t R when income drops to fraction  of last earned income Permanent income follows an AR(1) process, grows at rate G, subject to permanent shocks Current income subject to transitory shocks Solution method follows Deaton 1991 od13

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8 Generalisations Debt/Y hump shaped and reaches peak at age 40 Debt incidence is monotonically decreasing with age If cash on hand< 110% of consumption at given age  credit constrained then: 18% constrained at age 30, 2.5% at age 40, 0% thereafter If decrease replacement rate fraction constrained decreases at all ages If increase growth rate of permanent income fraction constrained decreases at all ages If increase time preference rate fraction constrained increases at all ages If increase interest rate fraction constrained decreases at all ages od13b

9 Empirical Literature on Debt and Constraints International comparisons Jappelli & Pagano 1989 AERBacchetta & Gerlach 1997 JME Micro Data US Jappelli 1990 QJECox & Jappelli 1993 JMCB Duca & Rosenthal 1993 JFinInterm Crook 1996 & 2001 App Fin Ec Gropp, Schultz & White 1997 QJEJappelli et al 1998 REStats Ferri & Simon 2002 UB WP Lyons 2003 JCA Grant 2005 EUI WP ItalyAustralia Fabri & Padula 2004 JBF La Cava & Simon BoA WP 2003 Magri 2002 BoI WP od14

10 Income insurance (SS, pensions, UI, EPL) Bankruptcy Usury Judicial efficiency, information sharing Asset prices (homes), homeownership Mortgage market institutions Taxation of incomes and wealth Preferences Organization of financial markets Institutional Aspects od14b

11 Institutional Differences NL ITUSSp Unemployment benefit insurance against income shocks greater in NL and Sp than IT and US Unemployment spend/GDP (%)2.30.90.42.2 Duration of unemployment benefit606624 (months) Employment protection2.32.40.73.7 (OECD index 0 to 6) (rank out of 28)1211?4 ----------------------------------------------------------------- Bankruptcy protection higher in US than IT and NL Bankruptcy discharge repaym no yes possible plan ---------------------------------------------------------------- od15

12 ------------------------------------------------------------------- Judicial efficiency and information sharing between lenders highest in NL and US than IT and SP NL ITUSSp Judicial enforcement days to collect bounced check 39 645 54147 days to evict delinquent tenant 52 630 49183 Time to repossess (months)660-84 8 7-9 #reports issued/person 0.64 0.046 2.3na by private credit bureau. ----------------------------------------------------------------- od15b Homeownership (%)199045686478 200253806885 House price increases in 90’srapid declinerapidrapid Home equity withdrawalhighnone high none -----------------------------------------------------------------

13 NL ITUSSp --------------------------------------------------------------------------------------------------------------------- Highest downpayment % and lowest LTV values in IT, mid values for NL and SP, lowest downpayment % for US Downpayment (%)25401120 Loan to value Typical(%)90557870 Max (%)11580na100 Typical term (years)30153015 ---------------------------------------------------------------- Tax deductibility higher in NL and US than IT and SP Tax deductibility for mortgage on main residenceYes cappedcapped capped C20% of $100k Є9k interest --------------------------------------------------------------- Italian banks are higher cost that elsewhere. Competition in all European markets increasing due to entry. od16

14 Summary ----------------------------------------------------- Greatest Min Credit Income insurance NL, Sp > IT, US IT, US BankruptcyUS > IT, NLIT, NL Usuryna Judicial efficiency, NL, US> IT, SPIT, SP information sharing Asset prices inflation(homes), NL, US > IT, SPIT, SP HomeownershipIT, SP > NL, USNL, US DownpaymentIT, NL > US, SPIT, NL Taxation deductionNL, US > IT, SP IT, SP Organization of financial Markets (Bank costs)IT > US, NL, SPIT ------------------------------------------------------------------ - od16b

15 Micro Data US: Survey of Consumer Finances, Federal Reserve Board, SCF Italy: Survey of Household Income and Wealth, Bank of Italy, SHIW Netherlands: DNB Household Survey, Central Bank of the Netherlands, DHS Spain: Spanish Survey of Household Finances, Bank of Spain, EFF od17

16 US Data SCF: 1992, 1995, 1998, 2001 Repeated cross section; household level Triennial; 4000-4500 hh per year Large variety of questions on wealth and debt holding (account- level) Oversampling of high wealth households Multiple imputations od18

17 Italian Data SHIW: 1991, 1993, 1995, 1998, 2000, 2002, 2004 Cross section with panel component (> 40%); household level Biennial; 5000-8000 hh per year Large variety of questions on wealth and debt holding (account- level) Some missing values imputed, only one implicate od19

18 Dutch Data 1993-2004 DHS Panel data; household level Annual frequency; 2000-3000 hh per year Large variety of questions on wealth and debt holding (account- level) od20

19 Spanish Data 2002 EFF Cross section household level 5000 hh Large variety of questions on wealth and debt holding (account level) Oversampling of wealthy Multiple imputations od21

20 Permanent income od22

21 Incidence of Debt ================================================================ Mortgages Other Total NL IT Sp US NL IT Sp US NL IT SP US ----------------------------------------------------------------------- 1991 11.0 14.1 23.0 1992 41.8 64.7 73.5 1993 40.6 12.5 46.0 15.0 64.7 25.1 1994 39.2 43.6 64.1 1995 41.2 13.4 43.4 43.3 14.1 66.2 64.6 24.6 74.7 1996 42.9 44.4 66.5 1997 43.3 43.9 66.3 1998 43.6 9.1 45.3 43.5 16.4 63.7 66.8 22.9 74.3 1999 42.1 42.8 67.2 2000 45.3 9.2 41.3 16.5 68.3 23.1 2001 42.6 46.6 40.0 64.2 65.6 75.5 2002 43.6 10.2 26.7 41.3 13.9 24.4 67.0 21.4 43.6 2003 41.0 40.5 65.4 2004 42.4 11.9 36.2 15.0 65.2 23.5 ======================================================================= NL: DHS, IT: SHIW, SP: EFF, US: SCF od23

22 Mean Debt Holding (1992 Euros, 1000's) ================================================================ Mortgages Other Total NL IT Sp US NL IT Sp US NL IT Sp US ---------------------------------------------------------------- 1991 1.75 1.44 3.19 1992 35.37 6.82 42.19 1993 29.57 2.18 3.75 1.72 33.32 3.90 1994 26.61 3.28 29.90 1995 27.66 2.25 35.51 3.45 1.65 7.65 31.11 3.90 43.16 1996 29.00 3.43 32.42 1997 27.91 3.26 31.20 1998 25.77 1.66 41.28 2.77 2.92 10.35 28.54 4.58 51.62 1999 27.28 2.59 29.86 2000 27.45 2.21 3.24 2.38 30.11 4.59 2001 33.63 45.24 3.90 9.55 37.90 54.79 2002 36.76 2.56 8.26 3.21 2.01 2.04 40.23 4.56 10.30 2003 34.18 4.21 38.02 2004 35.20 3.73 3.99 2.31 39.13 6.04 ================================================================ NL: DHS, IT: SHIW, SP: EFF, US: SCF od24

23 Median Debt Holding (1992 Euros, 1000's)if positive ================================================================ Mortgages Other Total NL IT Sp US NL IT Sp US NL IT Sp US ---------------------------------------------------------------- 1991 10.86 4.89 5.97 1992 53.15 5.40 21.26 1993 59.90 11.37 2.72 3.21 34.49 6.43 1994 57.36 2.65 30.96 1995 55.99 11.30 56.55 2.48 3.16 6.20 32.30 6.87 24.14 1996 56.58 2.55 33.99 1997 53.76 2.07 29.57 1998 49.36 12.55 64.05 2.23 4.18 7.78 28.32 6.27 33.96 1999 51.57 2.38 29.75 2000 43.08 16.04 2.33 4.01 18.05 6.42 2001 61.13 70.18 3.71 7.86 37.12 36.96 2002 64.44 18.44 24.46 3.08 4.43 4.29 36.56 7.38 16.01 2003 67.90 2.70 35.92 2004 68.01 24.37 2.76 4.21 34.76 8.78 ================================================================ NL: DHS, IT: SHIW, SP: EFF, US: SCF od25

24 Applicants and Rejections ============================================================== % Apply % Reject % Reject|Apply NL IT SP US NL IT SP US NL IT SP US -------------------------------------------------------------- 1991 0.9 1992 22.5 1993 22.2 0.8 1.1 4.3 1995 19.9 5.6 63.6 0.9 0.9 20.4 4.4 16.2 32.0 1998 21.4 6.0 63.6 0.8 0.5 21.8 3.9 7.7 34.2 2000 21.9 5.4 1.9 0.4 5.6 8.0 2001 26.1 64.9 1.5 19.9 3.7 30.7 2002 24.9 4.2 20.8 2.5 0.5 1.1 9.1 11.7 5.1 ============================================================== ================================= %Rejected or Discouraged NL IT SP US --------------------------------------------------------- 1993 2.3 3.0 1995 2.9 2.3 28.6 1998 3.0 2.8 28.4 2000 3.1 1.7 2001 2.3 26.9 2002 3.5 2.2 3.4 ================================= NL: DHS, IT: SHIW, SP, EFF, US: SCF od26

25 Observational regimes od27

26 Selection mechanisms Debt holding Wants debt Applies Accepted od28

27 Empirical modeling Observability rule: ML (normality, random effects, simulation) Various versions Non-convergence, partial convergence, etc od29

28 SHIW: no random effects in selection equations, but also no selection DHS: random effects, but no selection effects EFF: cross section, Tobit SCF: pooled cross section, no selection effects found (consistent two- stage estimator with double selection rule) Shall focus on single equation models for comparability od30

29 Prob(Credit Application) – marginal effects =========================================================== NL IT US SP ----------------------------------------------------------- wealth -0.0064** -0.0030** -0.0023* -0.0172** income1 0.0037 0.0033 0.0212** 0.0361 income2 0.1316** 0.0516** 0.2897** 0.1050* income3 0.2743** -0.0311  0.0729 0.0908 income4 0.0164 0.0211 0.0332 0.0906 income5 0.1739** 0.0237  -0.0810** 0.0242 income6 0.0456 0.0082 -0.0367** 0.0286 DYYP -0.0028** 0.0001 0.0011° -0.0014 unemployed -0.0680* 0.0003 -0.1683** 0.0426 selfempl 0.0025 0.0035 0.0077 0.0020 age < 30 0.0091 -0.0006 -0.0062° -0.0024 30/39 -0.0093** 0.0002 -0.0041° -0.0075 40/49 -0.0052* -0.0009* -0.0075** 0.0001 50/64 -0.0094** -0.0018** -0.0117** -0.0038** 65+ -0.0089** -0.0023** -0.0194** -0.0100** kids <=6yrs -0.0010 0.0036 -0.0063 0.0091 kids 7-12 0.0073 0.0066** -0.0057 0.0188 kids 13-19 -0.0044 0.0067** 0.0134 0.0145 kids 20+ 0.0108 0.0062** 0.0102 0.0237** single -0.0822** -0.0051 -0.0875** -0.0377* =========================================================== od31

30 Prob(Rejection | Application) – marg. effects ============================================== NL IT US ---------------------------------------------- wealth -0.0002** -0.0001 -0.0089** income1 0.0035 -0.0074 0.0093 income2 -0.0033 -0.0497  -0.0832* income3 -0.0082 0.0073 -0.1585** income4 -0.0061 -0.0445 -0.2362** income5 0.0018 0.0008 -0.0975** income6 -0.0088 -0.0375 -0.0117 DYYP 0.0001 0.0015* 0.0058** unemployed 0.0028 0.0468 -0.0222 selfempl 0.0064° 0.0013 0.0241° age < 30 0.0012° 0.0015 -0.0033 30/39 -0.0002 0.0004 -0.0093** 40/49 0.0003 0.0006 -0.0006 50/64 -0.0004° 0.0003 0.0002 65+ 0.0001 0.0009 -0.0069* kids <=6yrs 0.0003 0.0049 0.0142 kids 7-12 -0.0002 0.0095  0.0354** kids 13-19 -0.0001 0.0029 0.0420** kids 20+ 0.0013 0.0036 -0.0152 single -0.0006 0.1114* -0.0086 ============================================== od32

31 Prob{(Rejection | Application) or (Discouraged | No Application)} marg. effects =========================================================== NL IT US SP ----------------------------------------------------------- wealth -0.0001** -0.0011** -0.0080** -0.0037** income1 0.0004 -0.0011 0.0042 -0.0081 income2 -0.0013 -0.0026 -0.0158 -0.0159 income3 -0.0032 -0.0127 -0.1227** -0.0005 income4 -0.0001 -0.0093 -0.1585** -0.0004 income5 0.0030 0.0057 -0.0780** -0.0227 income6 -0.0017 -0.0077  -0.0150 -0.0069 DYYP 0.0000 0.0003** 0.0040** -0.0003 unemployed 0.0006 0.0160** -0.0238 0.0216* selfempl 0.0028** 0.0017 0.0182  -0.0006 age < 30 0.0001 -0.0002 -0.0031 -0.0016 30/39 -0.0001* 0.0003 -0.0074** 0.0001 40/49 0.0000 -0.0006* -0.0017 0.0001 50/64 -0.0001 -0.0002 -0.0032** 0.0001 65+ -0.0001 -0.0008** -0.0115** -0.0003 kids <=6yrs -0.0001 0.0026  0.0070 0.0033 kids 7-12 0.0001 0.0035** 0.0262** 0.0019 kids 13-19 0.0001 0.0021  0.0346** -0.0048 kids 20+ 0.0000 0.0027** -0.0020 0.0020 single -0.0006* 0.0030 -0.0186 -0.0022 ========================================================== od33

32 E(Debt | Debt> 0) - coefficients =================================================================== NL IT US SelCorr SP(Tobit) ------------------------------------------------------------------- wealth -0.024** -0.033** -0.008* 0.010 -0.125 income1 -0.088 -0.113* -0.080** -0.075 0.291 income2 0.829** 0.718** 1.940** 1.988** 5.658** income3 2.524** 0.362 1.372** 1.427** 4.176° income4 0.369 0.332 1.221** 1.219** 0.840 income5 1.259** 0.306 0.973** 0.967** 2.324 income6 0.175 0.651** 0.571** 0.521** -0.191 DYYP -0.014** 0.001 -0.023** -0.021** 0.039 unemployed -0.149 -0.058 -0.073 -0.109 0.136 selfempl 0.141° 0.657** 0.416** 0.382** -0.336 age < 30 0.192** -0.010 0.051** 0.042** 0.215 30/39 0.030** 0.014 0.006 0.008 -0.202* 40/49 -0.008 -0.023** -0.007 -0.014* -0.198* 50/64 -0.036** -0.017* -0.008° -0.008 -0.327** 65+ -0.031** -0.011 -0.055** -0.066** -0.459** kids <=6yrs 0.120** -0.021 0.053* 0.063* 1.661** kids 7-12 0.063° 0.026 0.047° 0.061** 0.974* kids 13-19 -0.005 -0.040 0.069** 0.061* -0.137 kids 20+ -0.051 0.026 0.063° 0.047 0.891** single -0.670** -0.353** -0.138* -0.114 -3.642** ================================================================= od34

33 Credit behavior differs across countries: Much greater percentage apply for credit in US than in NL or Spain, Italy least. (Italy consistent with greater social insurance). Of those who apply a much higher percentage are rejected in the US than Italy or the NL. The percentage in Spain is tiny. (Consistent with more credit bureau data available in NL and US) Percentage who are rejected or discouraged much larger in the US, about the same in NL, Italy and Spain. Re Application Less wealthy more likely to apply in all countries Prob of application follows life cycle model wrt age Unemployed less likely to apply in US & NL (low insurance & high insurance respectively) Effect of permanent income consistent with PIH only for NL. Conclusions od35

34 Re Credit Constraints Less wealthy rejected or discouraged in all 4 countries Income above permanent income increases chance of rejection or of being discouraged in Italy & US Unemployed more likely to be rejected or discouraged in Italy and Spain Self employed more likely to be rejected or discouraged in NL Re Debt Outstanding Income above permanent income reduces debt outstanding in NL and US Debt outstanding follows simulated precautionary savings model Self employed increases debt outstanding in Italy and US (consistent with less social insurance) od36

35 Combined Difference between income and permanent income reduces both the chance of application and the volume for those who demand debt in NL has no effect on the chance of application or on the volume in IT or SP increases the chance of application but reduces the volume in the US od37


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