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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. 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.
  2. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, vol. 85(5), pages 1327-36, December.
  3. 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.
  4. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  5. David B. Gross & Nicholas S. Souleles, 1999. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Center for Financial Institutions Working Papers 98-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. 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.
  7. 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.
  8. 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.
  9. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
  10. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  11. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  12. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  13. repec:fth:pennfi:69 is not listed on IDEAS
  14. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  15. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  16. T. Jappelli & J-S Pischke & N.S. Souleles, 1995. "Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources," Working papers 95-19, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
  18. 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.
  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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