The Credit Safety Net and the Costs of Credit Supply Shocks

forthcoming

The project “The Credit Safety Net and the Costs of Credit Supply Shocks” (CSCS) examines the effects of lender-imposed credit supply dynamics on households’ ability to weather idiosyncratic income shocks that are unrelated to the business cycle. It relies on longitudinal household surveys and leverages unexpected and exogenous health shocks to identify individual-specific, random variations in exposure to credit supply shocks. Beyond the foregone satisfaction of current consumption, CSCS emphasizes welfare costs by examining not only changes in household consumption and savings but also other financial coping strategies. These include asset divestments, such as exiting homeownership, and behavioral changes related to income-generating activities, like working overtime or taking sick leave. These outcome variables are crucial for welfare considerations given their implications for health and life quality conditions, yet they are often overlooked when evaluating the costs of imperfect credit markets. The policy implications are immediate and relate to a potential need for social insurance mechanisms to provide effective insurance for households.