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Job Loss, Credit Constraints and Consumption Growth

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We use direct evidence on credit constraints to study their importance for household consumption growth and for welfare. We distentangle the direct effect on consumption growth of a currently binding credit constraint from the indirect effect of a potentially binding credit constraint which generates consumption risk. Our data is focused on job losers. We find that less than 5% of job losers experi- ence a binding credit constraint, but for those that do, they experience significant welfare losses, and consumption growth is 24% higher than for the rest of the pop- ulation. However, even among those who are currently unconstrained and who are able to borrow if needed, consumption responds to transitory income.