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How important is variability in consumer credit limits?

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Author Info

  • Scott Fulford

    (Boston College)

Abstract

This paper demonstrates that credit limit variability is a crucial aspect of the consumption, savings, and debt decisions of households in the United States. While typical models of intertemporal consumption fix the credit limit, variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time since the savings act as insurance. This approach can explain the credit card puzzle: why around a third of households in the U.S. hold both debt and liquid savings at the same time. Unlike other approaches it is consistent with observed changes over time. It also offers an important new channel for financial system uncertainty to affect household decisions. One of the largest "assets" in the portfolio of U.S. households is their ability to borrow. Increased uncertainty about credit limits reduces the value of this asset, and so has effects similar to a decline in wealth.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 754.

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Date of creation: 01 Sep 2010
Date of revision: 19 Oct 2012
Handle: RePEc:boc:bocoec:754

Note: Previously circulated as "What credit card puzzle? Precaution, variable debt limits, and what we can learn from the small debts of poor people"
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Related research

Keywords: credit; debt; liquidity; credit card puzzle; financial uncertainty;

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References

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  1. Steven Stern, 1997. "Simulation-Based Estimation," Journal of Economic Literature, American Economic Association, vol. 35(4), pages 2006-2039, December.
  2. Andreas Lehnert & Dean M. Maki, 2002. "Consumption, debt and portfolio choice: testing the effect of bankruptcy law," Finance and Economics Discussion Series 2002-14, Board of Governors of the Federal Reserve System (U.S.).
  3. Irina A. Telyukova & Randall Wright, 2008. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 629-647.
  4. 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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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. More on the credit card puzzle
    by Economic Logician in Economic Logic on 2010-10-13 14:44:00

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  1. Economic Logic blog

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