Finance Seminar - Manuel Adelino, Duke University

Title: The Heterogeneous Effects of Household Debt Relief

Abstract: The marginal propensity to consume (MPC) out of liquidity provided by a large-scale debt forbearance program serves as a sufficient statistic for both changes in borrower creditworthiness and the stimulative effect of the policy. Using transaction-level data from a Portuguese bank during COVID-19, we show that the average MPC is about 15 cents per euro, with significant heterogeneity across households. Borrowers with lower liquid wealth and income exhibit substantially higher MPCs, indicating a deterioration in their creditworthiness. This heterogeneity underscores the trade-off between the short-term economic stimulus provided by debt forbearance and the potential credit risks that emerge once the program ends.