Borrowing Constraints and Credit Demand in a Developing Economy

Abstract

This paper investigates the determinants of credit demand in the presence of borrowing constraints in a developing economy. We model the determinants of observed debt for Chilean households while accounting for selection bias and the endogeneity of their income and specific household assets. Using a novel Chilean dataset, we estimate the relationship between household characteristics and consumer and mortgage debt. We find substantial differences in the nature of these relationships across the types of debt. For example, we find that the income elasticity for consumer debt is greater than 1 whereas for mortgage debt it is not. The results suggest the increased availability of credit, combined with the aging of the Chilean population, is likely to drastically change the distribution and level of Chilean debt. These findings are particularly relevant for other developing economies currently experiencing rapid income and debt growth