The Effect of Borrowing Constraints on Consumer Liabilities

Abstract

This paper explores the effects of liquidity constraints on consumer liabilities. While much empirical evidence attests to the importance of liquidity constraints in the U.S. economy, evidence about the effects of borrowing constraints on consumer balance sheets is scarce. Using the 1983 Survey of Consumer Finances data we estimate desired borrowing for unconstrained households. We then evaluate the gap between predicted.and observed debt for the sample of liquidity constrained consumers. Predicted debt is 75 percent higher than actual debt in the liquidity constrained sample. Thus, the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio. The removal of borrowing constraints would raise aggregate household liabilities by 9 percent. Copyright 1993 by Ohio State University Press.