Credit Contraction, Loan Renewal Decisions, and Social Sustainability in the U.S. Economy

Abstract This paper develops a New Keynesian DSGE model to examine how default risk and bank loan-renewal decisions shape credit contraction and its implications for social sustainability. Moving beyond the traditional intermediation-of-loanable-funds view, the model endogenizes bank balance-sheet adjustments by incorporating loan rollovers and default-contingent credit supply. A key innovation of this study is the integration of heterogeneous household liquidity timing, which distinguishes between early-access, liquidity-constrained households and delayed-access, wealth-accumulating households. Using Bayesian estimation on U.S. data (2000–2024), we analyze how productivity shocks propagate through credit fragility and financial access. The findings reveal that negative productivity shocks induce banks to tighten loan-renewal conditions, disproportionately affecting liquidity-constrained households. Crucially, the model uncovers a liquidity-timing disparity: while liquidity-constrained households receive immediate credit support to maintain consumption, they remain unable to accumulate wealth. In contrast, delayed-access households leverage their financial buffers to accumulate deposits, thereby exacerbating wealth inequality during downturns. The interaction between central bank liquidity provision and bank risk assessment emerges as a key determinant of financial resilience. Overall, the results indicate that ignoring the endogenous nature of credit contraction and the timing of liquidity distribution significantly understates both financial fragility and the distributional costs of economic shocks