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

See all articles by Kathleen Johnson

Kathleen Johnson

Board of Governors of the Federal Reserve System

Geng Li

Board of Governors of the Federal Reserve System

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

Johnson, Kathleen and Li, Geng, The Debt Payment to Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys (June 9, 2010). Available at SSRN: https://ssrn.com/abstract=1372062 or http://dx.doi.org/10.2139/ssrn.1372062

Kathleen Johnson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Geng Li (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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