Testing the Presence of Credit Constraints from Consumption Responses to Housing Deposit Changes

Utilizing unique features of chonsei housing contracts popular in South Korea, we conduct a new test of the presence of credit constraints. We extend a theory to characterize the impact on nondurable and durable consumption of a liquidity reduction arising from chonsei deposit increases. The theory implies the response under credit constraints should differ from those of an unconstrained response and this allows us to make inferences about the presence of credit constraints. Our empirical analysis uses Korea Labor and Income Panel Study (KLIPS) and supports the significance of credit constraints. Chonsei households' behavior is also indicative of very low income and wealth levels.