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How important is variability in consumer credit limits?

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  • Fulford, Scott L.

Abstract

Using a large panel this paper first demonstrates that individuals gain and lose access to credit frequently. The estimated credit limit volatility is larger than most estimates of income volatility and varies over the business cycle. Within a model, variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time. Using the estimated credit volatility, the model explains why around one third of American households engage in this credit card puzzle. The approach also offers an important new channel through which financial system uncertainty can affect household decisions.

Suggested Citation

  • Fulford, Scott L., 2015. "How important is variability in consumer credit limits?," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 42-63.
  • Handle: RePEc:eee:moneco:v:72:y:2015:i:c:p:42-63
    DOI: 10.1016/j.jmoneco.2015.01.002
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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 19:44:00

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    Cited by:

    1. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," Review of Economic Studies, Oxford University Press, vol. 86(6), pages 2605-2642.
    2. Pierre Mabille, 2019. "Aggregate Precautionary Savings Motives," 2019 Meeting Papers 344, Society for Economic Dynamics.
    3. Xinkuo Xu & Liyan Han, 2017. "Diverse Effects of Consumer Credit on Household Carbon Emissions at Quantiles: Evidence from Urban China," Sustainability, MDPI, Open Access Journal, vol. 9(9), pages 1-25, September.
    4. Fulford, Scott L., 2015. "The surprisingly low importance of income uncertainty for precaution," European Economic Review, Elsevier, vol. 79(C), pages 151-171.
    5. Antonio Antunes & Valerio Ercolani, 2020. "Public debt expansions and the dynamics of the household borrowing constraint," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 1-32, July.
    6. Kartik Athreya & Juan M. Sánchez & Xuan S. Tam & Eric R. Young, 2018. "Bankruptcy And Delinquency In A Model Of Unsecured Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 593-623, May.
    7. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
    8. Olga Gorbachev & Maria Jose Luengo-Prado, 2016. "The credit card debt puzzle: the role of preferences, credit risk, and financial literacy," Working Papers 16-6, Federal Reserve Bank of Boston.
    9. Stephanie Moulton & Donald Haurin & Samuel Dodini & Maximilian D. Schmeiser, 2016. "How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households," Working Papers wp351, University of Michigan, Michigan Retirement Research Center.
    10. Scott L. Fulford & Scott Schuh, 2015. "Consumer revolving credit and debt over the life cycle and business cycle," Working Papers 15-17, Federal Reserve Bank of Boston.
    11. Ben-David, Itzhak & Fermand, Elyas & Kuhnen, Camelia M. & Li, Geng, 2018. "Expectations Uncertainty and Household Economic Behavior," Working Paper Series 2018-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    12. Rajat Deb & Prasenjit Deb & Sujit Majumder & Sourav Chakraborty & Kiran Sankar Chakraborty, 2019. "Answering Savings Puzzle About Small Saving Schemes and Mutual Funds: Evidence from Tripura," Metamorphosis: A Journal of Management Research, , vol. 18(1), pages 7-19, June.
    13. Olga Gorbachev & María José Luengo-Prado, 2019. "The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 294-309, May.
    14. J. Carter Braxton & Gordon Phillips & Kyle Herkenhoff, 2018. "Can the Unemployed Borrow? Implications for Public Insurance," 2018 Meeting Papers 564, Society for Economic Dynamics.
    15. Luis E. Arango & Lina Cardona-Sosa, 2019. "Tarjetas de crédito en personas de ingresos medios y bajos en Colombia: ¿qué determina su uso?," Borradores de Economia 1089, Banco de la Republica de Colombia.
    16. Silva, Mario, 2017. "New monetarism with endogenous product variety and monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 158-181.
    17. Gomes, Francisco J & Haliassos, Michael & Ramadorai, Tarun, 2020. "Household Finance," CEPR Discussion Papers 14502, C.E.P.R. Discussion Papers.
    18. Scott L. Fulford & Scott Schuh, 2017. "Credit card utilization and consumption over the life cycle and business cycle," Working Papers 17-14, Federal Reserve Bank of Boston.
    19. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    20. Bronson Argyle & Taylor D. Nadauld & Christopher Palmer, 2019. "Monthly Payment Targeting and the Demand for Maturity," NBER Working Papers 25668, National Bureau of Economic Research, Inc.
    21. Arango, Luis E. & Cardona-Sosa, Lina & Pedraza-Jiménez, Nataly, 2021. "The use of credit cards among low- and middle-income individuals in Colombia and the channels of monetary policy," Economic Modelling, Elsevier, vol. 94(C), pages 150-169.

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    More about this item

    Keywords

    Credit card puzzle; Intertemporal consumption; Precaution; Credit limits; Household finance;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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