The Debt Payment to Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys
32 Pages Posted: 3 Apr 2009 Last revised: 12 Jul 2010
Date Written: June 9, 2010
Abstract
Liquidity constraints have been proposed as an important explanation for deviations from the rational expectations/permanent income hypothesis. This paper introduces to the liquidity constraint literature the ratio of a household’s debt payments to its disposable personal income (DSR). We find that a household with a high DSR is significantly more likely to be turned down for credit than other households. Also, the consumption growth of likely constrained households, identified using the DSR along with the liquid asset to income ratio, is significantly more sensitive to past income than that of other households, confirming the DSR’s value in identifying constrained households.
Keywords: Debt service ratio, Consumption Smoothing, Borrowing constraints
JEL Classification: E21
Suggested Citation: Suggested Citation
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