Tobias Renkin

We argue that consumer credit spreads matter materially for household choices and that time-varying spreads have important distributional consequences. Studying Danish household data, we show that elevated consumer credit spreads reduce indebted households’ consumption and that the marginal propensity to consume is countercyclical partially due to credit spreads. We study a HANK-model in which banks provide consumer credit and corporate loans. Through countercyclical credit spreads, frictional finance amplifies aggregate shocks and induces consumption inequality. Economies with less leveraged banks experience lower output and investment volatility, but aggregate consumption volatility rises slightly and household welfare can fall.