CFCM Seminar: Laura Murphy (Northwestern University)

Speaker: Laura Murphy (Northwestern University)

Title:   The term structure of debt commitments, liquidity concerns, and durable good choices 

 Abstract: This paper investigates the role of liquidity constraints in shaping loan term choices within the auto loan market, a major component of household debt in the United States. I address two key features of auto loan term lengths in the U.S.: their substantial cross-sectional heterogeneity and the notable rise in average term lengths over time. Using data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, along with supplemental income and price data, I establish a causal link between liquidity constraints and loan term lengths, demonstrating that much of the cross-sectional variation in term lengths can be attributed to differences in liquidity constraints among borrowers. To further analyse these patterns, I develop a quantitative model of term length choice, showing that access to longer loan terms enables borrowers to smooth consumption and manage debt more effectively. Through this model, I also demonstrate that while time-series variation in liquidity constraints alone does not fully account for the increase in term lengths, the narrowing gap between interest rates on debt and savings, when interacted with liquidity constraints, has contributed to the observed trend toward longer loan maturities.