On the interdependencies between mortgage, credit card and auto loans delinquency rates: evidence from the US states plus the District of Columbia

Abstract

Purpose

This study aims to explain how delinquency shocks in one type of debt contaminate the others. That is, the authors aim to shed light on the time pattern of delinquencies in different debt types.

Design/methodology/approach

This study analyzes the interdependencies between mortgage, credit card and auto loans delinquency rates in the USA from 2003 to 2019, using a panel VAR-X, the panel Granger causality tests and the Geweke linear dependence measures. The authors also compute the impulse response functions of a shock to one kind of debt on the others and decompose the variance of the forecast errors.

Findings

The authors find a statistically significant bidirectional Granger causality between the delinquencies. The Geweke measures of linear dependence and the Dumitrescu and Hurlin Granger non-causality tests support that mortgage predominantly causes credit card and auto loan delinquencies. Auto loans also cause credit card delinquencies. The impulse response functions confirm this pattern. This scenario aligns with a sequence where debtors consider rational first to default on credit cards, second on auto loans and only on mortgages in the last instance. Indeed, credit card delinquencies Granger-cause delinquencies in other debts when it occurs.

Originality/value

To the best of the authors’ knowledge, this is the first study to focus on the temporal pattern of delinquency rates for all the US states, using panel data. Furthermore, the results call for policymakers to design regulations to break the transmission channel from debt delinquencies.

Citation

Fuinhas, J.A., Silva, N. and Duarte, J. (2023), "On the interdependencies between mortgage, credit card and auto loans delinquency rates: evidence from the US states plus the District of Columbia", Studies in Economics and Finance, Vol. 40 No. 3, pp. 467-486. https://doi.org/10.1108/SEF-08-2022-0405