Intertemporal Consumption and Credit Constraints: Does Consumption Respond to An Exogenous Shock to Credit

Testing for the importance of credit constraints for intertemporal consumption allocation is notoriously difficult. This is because the key variable, the shadow value of the constraint, is unobserved. In this paper the question is asked if total household expenditure is affected by an exogenous increase in the access to credit provided by a credit market reform that gave access for house owners to use housing equity as collateral for consumption. If this is the case it is taken as evidence that some households have been credit constrained prior to the reform. The reform provides an exogenous increase in access to credit comparable to a year of disposable income or more for a considerable fraction of the households in the sample analyzed. The analysis is based on an extraordinary Danish panel data set with information on income and wealth that facilitates imputing total expenditure at the household level for years around the reform. It is found that some households, particularly among those aged 45 years or less, have been influenced by constraints