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Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data

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  • David B. Gross
  • Nicholas S. Souleles

Abstract

This paper utilizes a unique data set of credit card accounts to analyze how people respond to credit supply. Increases in credit limits generate an immediate and significant rise in debt, counter to the Permanent-Income Hypothesis. The "MPC out of liquidity" is largest for people starting near their limit, consistent with binding liquidity constraints. However, the MPC is significant even for people starting well below their limit, consistent with precautionary models. Nonetheless, there are other results that conventional models cannot easily explain, for example, why so many people are borrowing on their credit cards, and simultaneously holding low yielding assets. The long-run elasticity of debt to the interest rate is approximately -1.3, less than half of which represents balanceshifting across cards. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 117 (2002)
Issue (Month): 1 (February)
Pages: 149-185

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Handle: RePEc:tpr:qjecon:v:117:y:2002:i:1:p:149-185

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Web page: http://mitpress.mit.edu/journals/

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  1. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  2. Sydney Ludvigson, 1996. "The channel of monetary transmission to demand: evidence from the market for automobile credit," Research Paper 9625, Federal Reserve Bank of New York.
  3. Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 434-447, August.
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  12. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," Documentos de Trabajo 80, Centro de Economía Aplicada, Universidad de Chile.
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  16. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
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  18. Tullio Jappelli & Jörn-Steffen Pischke & Nicholas S. Souleles, 1998. "Testing For Liquidity Constraints In Euler Equations With Complementary Data Sources," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 251-262, May.
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  20. Tullio Jappelli & Marco Pagano, 1998. "The Welfare Effects of Liquidity Constraints," CSEF Working Papers 13, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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  1. Why the Housing Bubble Tanked the Economy And the Tech Bubble Didn’t
    by Amir Sufi in FiveThirtyEight Economics on 2014-05-12 10:03:14
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