The Dynamics of Work and Debt
This paper characterizes the labor supply and borrowing of a household
facing collateral requirements that limit its debt and compel it
to accumulate equity in its durable goods stock. The household’s
discount rate exceeds the market rate of interest, so it would otherwise
finance increased current consumption by borrowing against
future wages. Collateral constraints generate a positive comovement
between the household’s debt, the stock of durable goods and labor
supply following wage or interest rate shocks–as the household’s labor
supply adjusts to finance downpayments on new durable good
purchases and the subsequent debt repayment. Increasing the speed
of debt repayment amplifies these movements.
