Description

Previous studies of consumer debt risk estimate low sensitivities to negative economic shocks, contradicting the historical data. This work proposes a heterogeneous agents' model of household finances and credit risk. Families suffer labor income shocks and choose from a menu of new loans contracts, defaulting on debt commitments when unabl e to finance minimum consumption standards. Using survey data I simulate household credit default for Chile over the last 20 years, replicating successfully the highs and lows of consumer delinquency. Households, especially those of low income, are shown t o be highly vulnerable to changes in interest rates, credit maturities and liquidity.