How important are credit constraints for households? This is not obvious to determine empirically due to a host of issues: one observes only successful applications, data centers typically on consumption, or it is about loans, it is based on opinion surveys that Economists are rightfully uneasy about. In a paper just published in the International Economic Review, Attanasio, Goldberg and Kyriazidou found a nifty way to address better the question.
Specifically, they exploit data in the Consumer Expenditure Survey that includes auto loans contracts. Credit constrained households are limited by how much they can borrow, and are little affected by interest rates. Those that are not constrained are able to optimize how much to borrow and are responding more strongly to interest rates. Think about it: the choices of the first is really determined by the kink in the budget constraint, and by its slope for the latter. The data they use contains large heterogeneity in interest rates and maturities, the latter being highly correlated with the size of the loan.
Results? Increasing maturity by one year increases loan demand by about 90%, and the demand elasticity with respect to the interest rate is undistinguishable from zero. These results are very strong and indicative of strong aggregate credit constraints. Age does not matter, surprisingly, but income does, obviously.
What does this mean? We know the permanent income hypothesis does not hold strictly due to credit constraints. A model with such constraints, however, should not pile them on the young, but on the poor.