Household borrowing constraints and monetary policy in emerging economies
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Gustavo Arruda
Abstract
Credit markets in emerging economies can be distinguished from those in advanced economies in many respects, including the collateral required for households to borrow. This work proposes a DSGE framework to analyze one peculiarity that characterizes the credit markets of some emerging markets: payroll-deducted personal loans. We add the possibility for households to contract long-term debt and compare two different types of credit constraints with one another, one based on housing and the other based on future income. We estimate the model for Brazil using a Bayesian technique. The model is able to solve a puzzle of the Brazilian economy: responses to monetary shocks at first appear to be strong but dissipate quickly. This occurs because income – and the amount available for loans – responds more rapidly to monetary shocks than housing prices. To smooth consumption, agents (borrowers) compensate for lower income and for borrowing by working more hours to repay loans and erase debt in a shorter time. Therefore, in addition to the income and substitution effects, workers consider the effects on their credit constraints when deciding how much labor to supply, which becomes an additional channel through which financial frictions affect the economy.
Appendix
Prior and posterior marginal distribution. The marginal posterior densities are based on 10 chain, each which 100,000 draws based on the Metropolis algorithm. Black lines denote the posterior distribution and gray lines the prior distribution.
Prior and posterior marginal distributions.
Prior and posterior marginal distributions.
Prior and posterior marginal distributions.
Prior and posterior marginal distributions.
Impulse response function of a contractionary monetary policy shock.
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Articles in the same Issue
- Contributions
- An empirical study on the New Keynesian wage Phillips curve: Japan and the US
- Risk averse banks and excess reserve fluctuations
- Advances
- Signaling in monetary policy near the zero lower bound
- Contributions
- Robust learning in the foreign exchange market
- Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach
- Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking
- Agency costs and the monetary transmission mechanism
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- The financial accelerator and marketable debt: the prolongation channel
- The welfare cost of inflation with banking time
- Prospect Theory and sentiment-driven fluctuations
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- Household borrowing constraints and monetary policy in emerging economies
- The macroeconomic impact of shocks to bank capital buffers in the Euro Area
- The effects of monetary policy on input inventories
- The welfare effects of infrastructure investment in a heterogeneous agents economy
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- Collateral and development
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- Financial deepening in a two-sector endogenous growth model with productivity heterogeneity
- Is unemployment on steroids in advanced economies?
- Monitoring and coordination for essentiality of money
- Dynamics of female labor force participation and welfare with multiple social reference groups
- Advances
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- Contributions
- Changing demand for general skills, technological uncertainty, and economic growth
- Job competition, human capital, and the lock-in effect: can unemployment insurance efficiently allocate human capital
- Fiscal policy and the output costs of sovereign default
- Animal spirits in an open economy: an interaction-based approach to the business cycle
- Ramsey income taxation in a small open economy with trade in capital goods
