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Consumer Response to Changes in Credit Supply: Evidence from Credit Card Data

  • David Gross
  • Nicholas Souleles

This paper utilizes a unique new data set on credit card accounts to analyze how people respond to changes in credit supply. The data consist of a panel of several hundred thousand individual credit card accounts followed monthly for 24-36 months, from several different card issuers, with associated credit bureau data. We estimate the dynamic effects of changes in the credit limit and in interest rates, and consider the ability of different models of consumption and saving to rationalize these effects. We find that increases in credit limits generate an immediate and significant rise in debt. This response is sharpest for people starting near their limit, providing evidence that liquidity constraints are binding. However, even people starting well below their limit significantly respond. We show this result is consistent with conventional models of precautionary savings. Nonetheless there are other results that conventional models cannot easily explain, such as the fact that many credit card borrowers simultaneously hold other low yielding assets. Unlike most other studies, we also find strong effects from changes in account-specific interest rates. Debt is particularly sensitive to large declines in interest rates, which can explain the widespread use of teaser rates. The long-run elasticity of debt to the interest rate is about -1.3. Less than half of this elasticity represents balance-switching across cards, with most reflecting net changes in total borrowing. Overall, the results imply that the consumer plays a potentially important role in the transmission of monetary policy and other credit shocks.

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File URL: http://fic.wharton.upenn.edu/fic/papers/01/0110.pdf
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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 01-10.

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Date of creation: Mar 2001
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Handle: RePEc:wop:pennin:01-10
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  1. 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.
  2. 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.
  3. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  4. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  5. 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.
  6. repec:fth:pennfi:69 is not listed on IDEAS
  7. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
  8. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  9. David B. Gross & Nicholas S. Souleles, 2001. "An Empirical Analysis of Personal Bankruptcy and Delinquency," NBER Working Papers 8409, National Bureau of Economic Research, Inc.
  10. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  11. Paul S. Calem & Loretta J. Mester, 1995. "Consumer behavior and the stickiness of credit card interest rates," Working Papers 95-10, Federal Reserve Bank of Philadelphia.
  12. 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.
  13. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
  14. Sydney Ludvigson, 1996. "Consumption and credit: a model of time-varying liquidity constraints," Research Paper 9624, Federal Reserve Bank of New York.
  15. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  16. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  17. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  18. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  19. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
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