Testing the presence of borrowing constraints from consumption responses to housing deposit changes

Abstract

The literature on consumption recognizes the challenge of identifying the presence of borrowing constraints at the household level. In this study, we utilize a unique Korean housing contract, a chonsei contract, to characterize the consumption response to housing deposit changes when households are not limited by borrowing constraints. More specifically, we derive a lower bound for consumption changes, the violation of which indicates the presence of binding borrowing constraints. Applying the result to Korean household data, we identify a group of borrowing-constrained households and confirm the association between borrowing constraints and the excess sensitivity of consumption.