Premium
The Debt‐Payment‐to‐Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys
Author(s) -
JOHNSON KATHLEEN W.,
LI GENG
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00345.x
Subject(s) - economics , market liquidity , payment , debt , permanent income hypothesis , debt service ratio , asset (computer security) , constraint (computer aided design) , consumption (sociology) , household debt , value (mathematics) , monetary economics , liquidity constraint , debt ratio , household income , macroeconomics , finance , external debt , debt to gdp ratio , statistics , geography , mathematics , social science , geometry , computer security , archaeology , sociology , computer science
Liquidity constraints have been proposed as an important explanation for deviations from the rational expectations/permanent income hypothesis. This paper introduces to the liquidity constraint literature the ratio of a household's debt payments to its disposable personal income, the debt service ratio (DSR). We find that a household with a high DSR is significantly more likely to be turned down for credit than other households. Also, the consumption growth of likely constrained households, identified using the DSR along with the liquid‐asset‐to‐income ratio, is significantly more sensitive to past income than that of other households, confirming the DSR's value in identifying constrained households.