Dissertation Defense: Wenlan Luo
Thursday, March 23 at 9:00am to 11:00am
Edward B. Bunn, S.J. Intercultural Center, 550 37th and O St., N.W., Washington
Candidate Name: Wenlan Luo
Advisor: Mark Huggett, Ph.D.
Title: The Consumer Credit Channel of Monetary Policy
Using the Consumer Expenditure Survey, I document a new fact that the consumption response to monetary policy shocks is greater for households with higher default risk. I propose a consumer credit channel that accommodative monetary policy extends credit disproportionately to risky households which have higher propensities to spend out of extended credit. I study the mechanism in a Heterogeneous Agent New Keynesian model augmented with asymmetric information. In the model, credit limits arise because borrowers can default on loans and borrowing signals a risky type. Accommodative monetary policy extends credit as it lowers default rate and changes lenders’ beliefs on the types of borrowers. Calibrated to match the cross-sectional distribution of default rate, credit limit, and marginal propensity to spend, the consumer credit channel accounts for 63% of the heterogeneous consumption responses and 20% of the aggregate response. The model is used to assess the distributional effects of monetary policy and the "risk-taking" channel.
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