Household debt during the financial crisis: micro-evidence from Chile

Abstract

We examine evidence from a 2006 to 2009 data panel to explore how Chilean households were affected by the negative income shock observed during the recent financial crisis. Our results show that there is a negative and significant relationship between income shocks and changes in consumption debt. This suggests that increasing debt allowed households to smooth consumption during the financial crisis and provides new empirical evidence of the importance of financial constraints in a developing economy. We find evidence of heterogeneous effects by type of consumption debt and across households. Our results show that income loss increased indebtedness with banking institutions, but not with non-banking creditors. Across households, these results are driven mainly by those with financial assets and low levels of indebtedness before the crisis.