Consumer Default, Credit Reporting, and Borrowing Constraints

  • Author(s): MARK J. GARMAISE, GABRIEL NATIVIDAD
  • Published: May 16, 2017
  • DOI: 10.1111/jofi.12522

ABSTRACT

Why do negative credit events lead to long‐term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three‐year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.

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