Credit Constraints and US Households

Empirical tests of the permanent income/life cycle hypothesis of consumption often find that consumption is excessively sensitive to current income. Some evidence suggests that this finding is due to the existence of credit constraints on consumers. Using data relating to a period before 1983, Jappelli has tried to identify the characteristics of those who are credit constrained. However, conditions affecting the supply of credit have changed since then. Jappelli's work is replicated for a period before 1989. Using direct questions from the Survey of Consumer Finance, the paper identifies characteristics of households who have been rejected or discouraged from applying for credit, using untransformed household characteristics then using their principal components. The results show that being old and not working for pay, being White or having a high income and high wealth reduces the probability that a household will be rejected or discouraged from applying for credit.

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