D - Microeconomics
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House Prices, Consumption and the Role of Non-Mortgage Debt
This paper examines the relationship between house prices and consumption, through the use of debt. Using unique Canadian household-level data that reports the uses of debt, we begin by looking at the relationship between house prices and debt. -
How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data
Using a unique micro-dataset containing real and financial information on Canadian households for 2000–07, the authors address two questions: (1) What is the proportion of households whose consumption displays excess sensitivity to income, and who are likely liquidity constrained? -
Financial Crisis Resolution
This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks’ desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. -
Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market
This paper measures market power in a decentralized market where contracts are determined through a search and negotiation process. The mortgage industry has many institutional features which suggest competitiveness: homogeneous contracts, negotiable rates, and, for a given consumer, common lending costs across lenders. -
Why Do Shoppers Use Cash? Evidence from Shopping Diary Data
Recent studies find that cash remains a dominant payment choice for small-value transactions despite the prevalence of alternative means of payment such as debit and credit cards. For policy makers an important question is whether consumers truly prefer using cash or merchants restrict card usage. -
Consumer Bankruptcy and Information
We analyze the relationship between the intensity of banks’ use of soft-information and household bankruptcy patterns. Using a unique data set on the universe of Canadian household bankruptcies, we document that bankruptcy rates are higher in markets where the collection of soft, or qualitative locally gathered information, is the weakest. -
A Framework to Assess Vulnerabilities Arising from Household Indebtedness Using Microdata
Rising levels of household indebtedness have created concerns about the vulnerabilities of households to adverse economic shocks and the impact on financial stability. To assess these risks, the author presents a formal stress-testing framework that uses microdata to simulate how various economic shocks affect the distribution of the debt-service ratio (DSR) for the household sector. -
February 23, 2012
What Explains Trends in Household Debt in Canada?
Similar to the experiences in many other countries, household indebtedness in Canada has exhibited an upward trend over the past 30 years. Both mortgage and non-mortgage (consumer) credit have contributed to this development. In this article, the authors use microdata to highlight the main factors underlying the strong trend increase since the late 1990s. Favourable housing affordability, owing to factors such as income growth and low interest rates, has supported significant increases in home-ownership rates and mortgage debt. Much of the rise in consumer credit has been facilitated by higher housing values (used as collateral for loans) and financial innovation that makes it easier for households to access this credit. -
February 23, 2012
Household Insolvency in Canada
With increasing levels of household debt in recent years, the number of households that may be vulnerable to a negative economic shock is rising as well. Decisions made by both the debtor and the creditor can contribute to insolvency. This article presents some stylized facts about insolvency in Canada’s household sector and analyzes the role of creditors in insolvencies. The average debt of an individual filing for bankruptcy is more than 1.5 times that of an average Canadian household; bankruptcy filers tend to be unemployed or in low-wage jobs, and are typically renters. The article reports that banks that approve more loans per branch, which is interpreted as less-intensive use of soft information (such as the loan officer’s assessment of the applicant’s character), experience more client bankruptcies. This finding has important policy implications, because financial institutions that do not use soft information risk further deterioration in their lending portfolios.